How to balance the balance sheet if proj. assets are greater than proj liabilities + equity:
* Change financial policy (i.e.,issue more debt or equity, or pay less dividends).
* Buy fewer operating assets.
* Liquidate short-term investments.
Board of directors sets financial policy, especially with respect to dividends, long-term debt, and issuing equity.
Reducing operating assets will hurt firm, since these are the operating assets required to support the projected level of sales
Assume firm will:
* First liquidate any short-term investments;
* Then borrow using short-term debt to cover any remaining shortfall.
In this case, short-term debt is used to ...view middle of the document...
It starts with the last year of projections.
* The long-term is between the short term and the steady state--general firm and industry information is used to base projections.
* Frequently 3 to 5 years is the length of the short-term specific projections.
* It is difficult to maintain high growth for a long time
* Constrained by industry size
* Constrained by size of economy
* Competitors will enter profitable industries
* To maintain profit margins a firm must:
* Establish and defend a competitive advantage.
* Like brand identity, patents, reputation for quality, corporate culture, supply chain, technology that allows cost control.
* To improve profit margins a firm must:
* Improve its competitive position.
* Otherwise, profit margin declines.
* Accounts payable and net PPE as % of sales
Days payable is about 45 days, which is the industry average
* Projected assets too big? Short-term debt is the plug—after driving short-term investments to zero.
* Projected liabilities too big? Short-term investments are the plug—after driving short-term debt to zero.
* Is it reasonable for sales to be so large?
* how big is company relative to industry?
* relative to economy?
* How much is being invested in assets from year to year? Are these increases similar to other years?
* Rationale for including additional items in the condensed financial statements:
* (1) provide more detail and accuracy in reporting operating performance
* (2) account for nonoperating performance
* (3) allow us to convert GAAP-based statements into free cash flows
* Operating performance
* Nonoperating performance
* Adjustments due to GAAP
* Long-Term Investments and Nonoperating Income
* activities that are not operating activities
* noncontrolling investments in other firms
* investments in real estate or other stocks and bonds
* These investments are accounted for in long-term investments; income from these investments is reported in the nonoperating income account.
* Other Long-Term Liabilities
* Claims by investors other...