Chapter 12
Corporate Valuation and Financial Planning
1. Identify four ways in which managers use projected financial statements.
2. Define the following:
• Operating plan –
• Financial plan –
3. Briefly describe the key elements of an operating plan.
4. How can the financial plan be used to help management provide guidance to security analysts?
5. Identify the five uses of free cash flow and how these uses are related to a financial plan.
6. What is the forecasted financial statements (FSS) method and what are its two major
applications?
7. Which items comprise operating current assets?
8. Why is it reasonable to assume that current assets grow proportionally to sales?
9. What are some reasons that net PP&E might grow proportionally to sales, and what are some
reasons that it might not?
10. What are spontaneous liabilities?
11. What is the three-step process used to project financial statements?
12. Preliminary additional financing generally comes from three sources. What are they?
13. What is the financial surplus or deficit?
14. Write out the AFN equation and briefly explain its use.
15. Discuss the five key factors on which external financing depends as indicated in the AFN
equation.
16. Define the following:
• Self-supporting growth rate –
• Excess capacity adjustments • Lumpy assets –
• Economies of scale –
17. Define the following:
• Full capacity sales –
•
•
Target fixed assets to sales ratio –
Required level of sale –
18. Is it possible for the AFN to be negative? If so, what would this indicate?
19. What advantages does the forecasted financial statement method have over the AFN equation
for forecasting financial requirements?

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