Submitted by: Submitted by mikser41
Views: 320
Words: 919
Pages: 4
Category: Business and Industry
Date Submitted: 02/08/2012 11:18 AM
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 “plug” the shortfall in liabilities.
In opposite case:
Assume firm will:
* First pay off any short-term debt;
* Then put any remaining funds into short-term investments.
In this case, short-term investments (also called marketable securities) are used to plug the shortfall in assets.
Projected operating assets = cash + accounts receivable + inventories + net PPE
* Are asset and liability changes from year to year smooth? If not, is that expected?
* For example, PPE increases $77.4 million in 2004, but that was predicted because a new plant is coming online.
* Cash falls in 2004. But that is also predicted due to changes in information technology.
* Short-term investments decrease to zero—this is because we projected that Van Leer wouldn’t simultaneously borrow short-term and invest short-term.
* Short-term borrowing increases substantially. If this happens in subsequent years, the long-term debt policy (or dividend policy) may need to be revisited.
* There are three types of time periods in these projections:
* The short-term, in which there is plenty of specific information on which to base projections
* The steady state, in which the firm is assumed to be at constant growth and some form of competitive...