# week 4 - FINANCE

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- Created by: jmf00632
- Created on: 04-11-19 17:57

• Dividend pay-out ratio (D)

– This is the propotion of a net income paid out as a dividend = dividend paid / net income

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• Retention Ratio (B)-

THIS IS THE PROPORTTION OF NET INCOME RETAINED Retained earnings / net income (what is left of the payout) e.g. 40 percent dividend payout the retnetion rate (b) would be 60 percent

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New financing (capital structure decision) can be sourced from:

• Externally • Credit: new bank loans or bonds • Equity: issuing new shares • Internally • Financial policy change: change dividend pay-out ratio to retain more funds within the business

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how can external financing be financed? (4)

1. new borrowings 2, new shares 3. cutting or wiving the dividend 4. maintainnig a constant debt (equity ratio)

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How do I calculate the dividend?

dividend pay out (e.g. 40 percent) x net income = dividend payout

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when asked for anything to do with next year e.g external financing or equity fiancing for next year ......

make a new income statement and balance sheet

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net income

old income x new sales increase

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new assets

old assets x sales increase

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new asset equity

opennig equity + retained earnings (which is the new net income) e,g weve paid out 40 percent so retainnig 60 percennt

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how do we calculate external financing

assets - debt plus equity

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profit margain is the same as......

net income

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total asset turnover......

same as total assets

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to work out dividend payout ratio.....

cash dividends payment/net income

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how do you work out the sustainable growth rate for a company?

retained earnnigs = net income - dividends

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equity at the end of the year -

retained earnings + equity

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how to find the DIVDIEND payout ratio –

4 steps on here

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1.

1. find the sustainable growth rate (Sustainable growth rate = (ROE x b) / [1 - (ROE x b)]

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2.

2. We want to solve for ‘b’, the retention rate. If we can find the retention rate, we can then find the dividend payout rate because we know that 1 – b = dividend payout rate.

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3.

3. if we are not given enough info then we need to use DU POINT – WHICH IS THE END OF RETURN ON EQUITY EQUATIO – if you remember that it is here on the formula sheet then you wont have to remember du point jess

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4. - you can use trial and error or algebra for the next parts

REMEMBER TO GO TO MONICA FOR HELP ON THIS

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What are the 2 dimensions of the financial planing process? (1)

plannig horizon: the long range time period in which the financial plannin process focuses, which is usually 2 to 5 years

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the second dimension - aggregation

the process by which smaller investment proposals of each of a firms operational units are added up and treated as one big project

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why should a firm create a financial plan?

Financial planing makes explicit linkages between investment proposals for the different operating activities of the firm and its available financing choices. The financial plan allows the firm to develop, analyze, and compare man different scenario

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another reason.....

Financial planning avoid surprises by identifying what may happen to the firm if different events take place.

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another reason.......

Financial planning is a way of verifying that the goals and plans made for specific areas of a firm's operations are feasible and internally consistent.

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another reason.....

Forces managers to think about goals and establish priorities.

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definition of percentage sales approach

a financial plannig meathod in which accounts are varied depending on a firms predicted sales level

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what is the goal of a percentage sales approach?

the goal of a percentage sales approach is to develop a quick and practial way of generating pro form statements

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capital basis intensity ratio equation

firms total asset / sales

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capital basis intensity ratio definition

amount of assets needed to generate £1 in sales

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Unless it is modified, what does the percentage of sales approach assume about fixed asset capacity usage?

In Percentage of sales approach during calculating Fixed Assets we calculate the full capacity sale by current sales divided by current percentage of capacity uses, if increased (Projected) sales are lesser then full capacity sale then we did not

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continued

change in projected Fixed Assets. But higher projected sales require higher Fixed Assets than its full capacity then we change according to full capacity sales level.

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internal growth rate definition

the maximum growth rate a firm can acheive without using external finace

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sustainable growth rate

the maximum growth rate a firm can achieve without external equity financing while maintainnig a constant debt equity ratio

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what is return on equity (ROE)

The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company

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how is a firms sustainable growth related to its accounting return on equity

• Companies with high SGRs are usually effective in maximizing their sales efforts, focusing on high-margin products, and managing inventory accounts payable and accounts receivable.

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what are some important elements that are often missing in financial planing models?

cash flow size, risk, and timing.

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what is an iterative process?

repeated cycle

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why do we say that financial planning is an iterative process?

or each financial period, financial planning process has to be repeated to ensure that the organization does not face shortage of fund - financial conditions of an entity can change

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How to work out the internal growth rate? - step by step - step 1

1.work out ROA- 2. WHEN PUTTING THIS INTO THE FORMULA REMBE TO DIVIDE ROA BY 100 E.G. 13.6 /100

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Step 2?

2. work out dividend payout ratio - dividends / net income = e.g. 0.25

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step 3?

3. work out retention rate (b) = 1 – dividend payout ratio e.g. 0.25

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step 4?

you can now use the internal growth rate formula and times the answer by 100

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first step - dividend payout ratio (INTERNAL GROWTH RATE)

first step - TA - TL + E

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Second step - dividend payout ratio (INTERNAL GROWTH RATE)

find roa

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third step - dividend payout ratio (INTERNAL GROWTH RATE)

find b - roa + roa e.g. 0.169 + 0.0169 (remeber to add another 0 after the . )

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fourth step dividend payout ratio (INTERNAL GROWTH RATE)

that answer divided by the wished interna growth rate e.g. 0.10 / answer

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if asked about interest and pesion schemse and for every £1 you make you get £2 e.c.t. .... step 1

determine whole contribtion so: 100,000 x 0.02= 2,000 - orginally had 4,000 so 4,000+2,000= 6,000

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step 2

pv annuity forumla - and that answer using the single cash flow fv formula

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## Other cards in this set

### Card 2

#### Front

• Retention Ratio (B)-

#### Back

THIS IS THE PROPORTTION OF NET INCOME RETAINED Retained earnings / net income (what is left of the payout) e.g. 40 percent dividend payout the retnetion rate (b) would be 60 percent

### Card 3

#### Front

New financing (capital structure decision) can be sourced from:

#### Back

### Card 4

#### Front

how can external financing be financed? (4)

#### Back

### Card 5

#### Front

How do I calculate the dividend?

#### Back

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