30.5 30.3

a. Quarter: First Second Third Fourth A. Cash Requirements Cash required for operations 135.6 72.6 –120.0 –170.3 Interest on bank loan 0.0 2.0 2.0 1.9 Interest on stretched payables 0.0 1.5 5.4 0.0 Repayment of last quarter’s stretched payables 0.0 30.6 107.2 0.0 Lost interest on sold securities 0.0 0.5 0.5 0.5 Total cash required 135.6 107.2 –4.9 –167.9 B. Cash Raised in Quarter Bank loan 80.0 0.0 0.0 0.0 Stretched payables 30.6 107.2 0.0 0.0 Securities sold 25.0 0.0 0.0 0.0 Total cash raised 135.6 107.2 0.0 0.0 C. Repayments Of bank loan 0.0 0.0 4.9 75.1 D. Addition to Cash Balances or Security Holdings 0.0 0.0 0.0 92.8 E. Bank Loan Beginning of quarter 0.0 80.0 80.0 75.1 End of quarter 80.0 80.0 75.1 0.0 2022 2023 2024 2025 2026 Free cash flow –23.4 –28.1 –33.7 –40.4 –48.5 Horizon value 1,659.4 Total cash flow –23.4 –28.1 –33.7 –40.4 1,610.9 PV at 15% 714.2 See Self-Test 30.5.

Chapter 30 Financial Planning 887 30.6 Internal growth rate

=

re_i_n_v_n e_set_te _ad_s se_ea_tr_sn i_n_g_s

= plowback ratio × re turn on equity × equity/net assets Sustainable growth rate

=

plowback ratio × return on equity As long as the company has some debt, equity/net assets must be less than 1.0, and the internal growth rate must be less than the sustainable growth rate.

Look up the financial statements for any company on finance.yahoo.com. Make some plausible forecasts for future growth and the asset base needed to support that growth. Then use a spreadsheet program to develop a five-year financial plan. What financing is needed to support the planned growth? How vulnerable is the company to an error in your forecasts?

We continue our tour of current assets with the firm’s accounts receivable. When one company sells goods to another, it does not usually expect to be paid immediately. These unpaid bills, or trade credit, compose the bulk of accounts receivable. The remainder is made up of consumer credit—that is, bills awaiting payment by the final customer.
Management of trade credit requires answers to four sets of questions:
1. How long do you give customers to pay their bills? Are you prepared to offer a cash discount for prompt payment?