Answer & Explanation:Please number your answers so I know what answer correlates with what question. Also, if you are unsure about any of the questions, please do not accept the question. I will be using a plagiarism checker other than the one provided by the site.1.
From the scenario, cite your forecasting
conclusions that support TFC’s decision to expand to the West Coast market.
Speculate as to whether or not the agency conflict discussed in the scenario
could become a roadblock to your conclusions. Provide a rationale for your
response. Scenario attached.
2.
From the mini case, recommend two (2) desired
characteristics of a board of directors. Provide support for your response,
citing the ways in which these characteristics usually lead to effective
corporate governance.
3.
Assess the financial performance forecasting
process, identifying the assumptions made that are most likely to cause a gap
between the forecast and actual performance. Indicate how these gaps may be
minimized. Provide support for your rationale.
4.
Create an argument supporting the value of
forecasting to an organization. Provide support for your argument.
5.
Assess the market and shareholder behaviors when
a publically traded company makes the decision not to pay dividends to its
shareholders, suggesting how management should react to these behaviors.
Provide support for your rationale.
6.
Evaluate the factors that an investor may
consider when deciding whether or not to invest in a company with a policy of
non-dividend payments. Indicate whether or not you believe this a prudent
choice for some investors. Provide support for your rationale.
fin534_week7_scenario_script_10_10_13_final.docx
Unformatted Attachment Preview
FIN534 Week 7 Scenario Script: Forecasting Operations and Agency Conflicts
Narration
Slide Scene/Interaction
#
Slide
1
Intro Scene
Slide
2
Scene 2
•
Joe meeting the intern
•
Conference room
•
End of scene
FIN534_7_2_Joe-1: Hello everyone. I
wanted to stop by and tell you how great of a
job you are doing with this analysis. Your
expertise in many financial areas has helped us
in making our decision to expand.
Before we can move forward with this project,
we want to be extremely confident that this
move is the best choice for TFC.
FIN534_7_2_Linda-1: Joe, we have
reviewed:
TFC’s financial statements; and
Calculated ratios and compared them to the
industry averages;
Calculated TFC’s stock price using the
constant growth model;
Calculated a required rate of return for TFC
and used it for capital budgeting;
And we ran many calculations using the net
present value, internal rate of return, the
payback period, and evaluated our cash flows,
to help in the decision making for this project.
So I have to ask, what can possibly be next?
FIN534_7_2_Joe-2: Linda, that is quite a list
and I can see that a lot of work went into it this
by you and your intern. The Strayer MBA
program must be providing its students with
the necessary concepts to translate to realworld applications. Let’s use some more theory
to analyze some more data BEFORE we make
a decision. Remember, we are a conservative
company, so we want to be confident before
we make the ultimate decision which will
change our present day TFC.
FIN534_7_2_Joe-3: What we want you to do
with your intern is look at the financial
planning side of TFC. There are two main
pieces of the financial planning and they
consist of the Operating Plan and the
Financial Plan.
FIN534_7_2_Linda-2: Joe, you are right. We
need to look at those areas before making a
decision. So, our analyses need a little more
work!
FIN534_7_2_Joe-4: Right! . But, we are
getting close to a decision. Plus you and your
intern are doing such a great job we don’t want
you to impede your progress. Maybe in a
hundred years?
FIN534_7_2_Linda-3: Joe, you have that
special touch of wanting to do more for the
company. That is one of the reasons why it is
such a great company to work for; and to
workout. (laugh)
FIN534_7_2_Joe-5: That is simply the TFC
way!
Don will be joining you in a bit to discuss the
financial planning piece of the project. As
always, good luck!
Slide
3
Scene 3
•
Don in conference room
•
•
Go to next slide
FIN534_7_3_Don-1: So Joe filled you in on
your next part of the project of looking at both
the Operating Plan and the Financial Plan.
The Operating Plan will look at TFC for
future operations in our market segments and
will focus on our sales and marketing
strategies, growth opportunities and offerings.
Typically an operating plan will focus on the
immediate five years. Since we are doing a lot
in the first year, we will focus on that time
horizon. A lot of what-if analyses will be done
with the operating plan.
FIN534_7_3_Don-2: The Financial Plan will
focus on projecting pro forma financial
statements. These statements will help in
deciding how much free cash flow there will
be available in future years to finance parts of
the operating plan. We will again just look at
the first year. Typically, we would look at five
years but since we are doing so much in the
coming year, our focus will be on that period.
FIN534_7_3_Linda-1: There are also other
reasons why we should be forecasting free
cash flows. Let’s take a close look at these
rationales.
Slide
4
Scene 4
•
CYU
Narrator: In addition to forecasting
free cash flow, what are some ways
in which managers should want to
use pro forma, that is projected
financial statements? Select all that
apply
1) The statements can help in
seeing if the company is in
line with its future financial
goals (correct)
2) They can help create “What
if” analyses (correct)
3) They will help in
implementing policies (nice
try – but managers need to
look at the future with pro
formas for decision making
4) They will help in planning for
future financing of projects
(correct)
5) They help in setting the
capital structure (incorrect –
Nice try. Capital budget is
usually an internal policy that
pro formas can use in their
creation but they typically
don’t get involved in setting
the policy.
Slide
5
Scene 5
•
Linda In conference room
•
Put Up Operating Plan
•
Linda switches poses
•
Go to next slide
FIN534_7_5_Linda-1: There are many
reasons to have pro forma financial statements.
Here at our company, these pro forma financial
statements assist with the financial planning..
As Joe mentioned, the financial planning is
composed of two parts, the Operating Plan and
the Financial Plan.
Let us look at some of the components of the
Operating Plan
FIN534_7_5_Linda-2: Don previously
mentioned the prime areas that we look at
when building our Operating and Financial
Plans. One area in particular is forecasting
revenue. We are expecting assets to double in
size with this expansion project in the first
year; therefore, we have to think of sustained
growth. This, however, may be difficult to
predict.
FIN534_7_5_Linda-3: Keep in mind that our
Accounting Department has been analyzing
many trends to get a forecasted revenue
growth rate of ten percent. Also, in anticipation
for the cost cutting measures that is being
planned, the Accounting Department also
projects that Operating Expenses will drop
from eighty two percent of sales to seventy five
percent. With these changes the pro forma
statement in the following year will show a
profit margin more than ten percent, which
will make our shareholders happy if it is met.
Slide
6
Scene 6
•
Projecting Financial
Statements
Forecasting any operating accounts;
Keeping in line with a company’s
policy on taking on debt, equity and
paying dividends and;
Making sure the operating
plan can be funded.
FIN534_7_6_Linda-1: We were able to
create some pro forma statements for TFC’s
Financial Planning process. This may seem
like a pretty straightforward process but there
is a lot of work that goes into the decisions.
There are three basic points to projecting
financial statements and they consist of
Forecasting any operating accounts;
Keeping in line with a company’s policy on
taking on debt, equity and paying dividends
and;
Making sure the operating plan can be funded.
But there is more.
During the process a company can go through
many iterations of scenario analysis to
determine what is best for the company. It is
much like going to a show on Broadway, as
you only get to see the finished production and
not all the leg work behind the scenes. The
same can be thought of when it comes to
projecting financial statements. Much analysis
goes into the decision making as the company
plans around it.
Slide
7
Scene 7
•
Financial Planning
•
Agency Conflicts
Here at TFC, we have many departments look
over the projections before we sign off on
them.
FIN534_7_7_Don-1: Linda is right about the
final projected financial statements process.
Since we are a conservative company who is
always thinking about how to maximize
shareholder wealth, our process takes time to
go through the proper channels. For this
expansion project, we don’t have the same
luxury as other projects, but we still have to
look at each area before making an informed
decision.
FIN534_7_7_Don-2: As a publicly traded
company, we have an obligation to do the right
thing for many stakeholders including
shareholders, creditors, employees, and others
who have a vested interest in TFC. With that
comes Agency Conflicts.
FIN534_7_7_Linda-1: Oh, yes. Agency
Conflicts. Do you think this will hurt our
chances to expand?
FIN534_7_7_Don-3: Before we think that
way, let’s have Joe talk to us about Agency
Conflicts. He has first-hand experience in the
area.
Slide
8
Scene 8
•
Joe in Conference Room
•
•
FIN534_7_8_Joe-1: Agency Conflicts is an
area that I am involved with on a daily basis.
Next slide
To better understand it, TFC sets up agency
relationships by hiring Agents to act on behalf
of the company. The typical agency
relationships include stockholders versus
creditors; controlling interest owners versus
non-controlling interest owners; and
stockholders versus managers.
We try to keep agency conflicts down as we
have a set of rules that managers need to
follow; however, there are always exceptions.
Our belief is if we can keep agency conflicts
down, the costs around those conflicts, called
agency costs, will be lower. And, we all know
that lower costs means more profit for TFC!
Let’s look at each of the agency relationships
and see if we are doing an adequate job of
keeping agency costs down.
Slide
9
Scene 9 –
Joe in room
Conflicts between
Stockholders and Creditors on
slide
FIN534_7_9_Joe-1: When looking at
stockholder versus creditors there is a
difference in points of views. Creditors are
lending to TFC so they have a vested interest
in seeing the investment pay off. Our creditors
want to make sure we don’t default on our
loans. But the decision making is not coming
from the creditors but instead our mangers,
acting for our shareholders. In other words,
the Creditors lend to TFC and our managers
are responsible for keeping the company
growing. The potential agency conflicts arise
because Creditors want to get paid, but
managers are making decisions with company
assets that can potentially affect the Creditors
payment schedule.
FIN534_7_9_Joe-2: Our expansion project is
a great example of this. Based on our capital
structure for this project, we are going to have
to take on a lot of new debt. So, TFC will be
taking on more risk in doing the project, which
is what we saw with our cash account, but
creditors would rather have risk minimized.
Hence, an agency conflict.
SHOW OON THE SCREEN for
EMPHASIS…… One choice would be
to have our creditors raise the
interest rate they are charging us to
do the project.
Second choice: to spell out in detail
what the increased debt will be used
for as well as put in place company
performance measures.
Slide
10
Scene 10
•
Joe in room
So what can be done? One choice would be to
have our creditors raise the interest rate they
are charging us to do the project. That is not
TFC’s first choice as it can raise our debt
expense considerably; thereby, increasing risk
for us.
The second approach and the one that has been
adopted by TFC is to spell out in detail what
the increased debt will be used for as well as
put in place company performance measures.
These debt covenants act as a watch guard for
TFC. We understand that our Creditors want to
see risk kept low, but we also want to grow.
FIN534_7_10_Joe-1: With the second
agency conflict of inside owners versus
outside owners, it results to who is bearing
the cost. Take for example, when TFC was a
private company, My family bore all the costs
•
•
•
controlling interest owners
versus non-controlling
interest owners
Next screen
but also reaped the benefits. This included
some well-deserved vacations at the
company’s expense. When we decided to go
public, we now took on outside owners. We
still had the company pay for well-deserved
company vacations, but the expense was now
also being consumed by our external owners.
As a result, our external owners demanded a
higher rate of return. Financially, we were
doing fine, but the external owners felt that the
money should have gone back into the
business.
FIN534_7_10_Joe-2: What did we do?
Well, my family met and decided that it was in
the best interest of TFC to stop having the
company pay for our vacations. We felt that
when we decided to go public we gave up that
luxury. We communicated our new policy and
added additional language regarding equality
across all the owners. That is why we don’t
have any preferred stock or special interest
stock. We want everyone to be on the same
“workout” field.
Slide
11
Scene 11
Joe speaking about Managers
and Shareholders conflicts
•
Next Slide
Use tablet to put the six main ways in
which the actions of our managers
may affect the value that our
shareholders desire.
This new policy has worked out great for the
company and for establishing relationships.
FIN534_7_11_Joe-1: The third agency
conflict is the one that we encounter the most
which is conflicts between the decision
making managers and the shareholders of
TFC.
Shareholders want to see TFC’s value go up.
Remember, stock price maximization? But our
managers also have personal and company
goals that they want to meet as well. And if
the actions by the managers to meet their goals
are not in line with stock price maximization,
conflicts can arise.
FIN534_7_11_Joe-2: There are six main
ways in which the actions of our managers
may affect the value that our shareholders
desire. I’ve created an activity for you to use
on this tablet as we discuss each of the main
ways in which actions of our managers may
affect the value that our shareholders desire.
FIN534_7_11_Joe-3: First, Efforts by TFC’s
managers regarding profit maximization. If
our managers are spending more time at
“extracurricular” activities for the company
instead of seeking ways to build the company.
We like it where our managers, including
myself, are out there marketing TFC, but we
also need to be in house.
To try to alleviate this conflict, TFC has
encouraged managers to be selective in those
additional activities. So far this initiative has
really been paying off.
FIN534_7_11_Joe-4: Second, Managers
overspending on non-essential items. At TFC
we are cash conscious so managers have to go
through an approval process to ensure they are
spending within company guidelines. We are
cash focused therefore extravagant purchases
are not permissible.
FIN534_7_11_Joe-5: Third, Inability to act
prudently when it involves closer
relationships. At times our managers are put
in a bind and they need to act accordingly even
though it may affect someone who is close to
them. All of our managers know that they need
to separate business from their personal
feelings. This is easier said than done.
However, prudent decisions need to be made if
we want to grow our business.
Our business model takes into consideration
the personal side of the business and that is
why we do so several analyses before making
a decision. I am pleased to say that our model
has been quite successful as we have never laid
off an employee in the history of our company.
FIN534_7_11_Joe-6: The fourth involves
Risk Taking. With this conflict, managers may
be reluctant to take on a project with risk even
if it is projected to be a winner. Take for
example our expansion project. It is very risky
and if not successful the result can be bleak for
TFC. The blame would then go to me and the
management staff involved in the project. As a
result of this managers may be reluctant to take
on the risk even though shareholders stand to
benefit from it.
To alleviate this conflict, we treat it much in
the same way as the other conflicts and
complete a detailed review of any high
exposure project to ensure we are comfortable.
FIN534_7_11_Joe-7: The fifth is Cash
Management Decision Making. It is no secret
that TFC is a cash conscious business. Cash is
good but too much cash may not be.
Remember the saying, “Cash is king”. Cash
flow is important to the general health of the
business. It might sound odd but think of it
from the point of view of the shareholder.
They like to see some immediate returns on
their investment. If a company is continuing to
hold on to their cash, shareholders are not
reaping the benefits. Also, extra cash may
entice managers to make poor investment
decisions down the road.
Cash is also important but it also needs to be
regulated here. In order to regulate this cash
we have a policy in place to keep cash at an
adequate level that will help us be financially
strong while also giving back to our investors
in stock growth and dividends.
FIN534_7_11_Joe-8: The sixth and last area
involves Information Sharing. With this
conflict, managers may not share all available
information in a timely manner as they don’t
want their competitors to gain an advantage.
Also, if the company is not doing well, they
may delay the release of bad information or
change it to not look as bad. At TFC, we are an
open book company. Our policy is to share all
available information as soon as possible. We
are more focused on our company image and
believe that being up front is the best way to
go.
Slide
12
Scene 12
•
Joe and Linda finishing up
Agency Conflicts
FIN534_7_12_Linda-1: Joe, thank you so
much for explaining the potential agency
conflicts. I never realized how much there is to
this concept.
FIN534_7_12_Joe-1: You are welcome
Linda and I am always learning something
new every day. That is why we are putting so
much effort into analyzing this expansion
project. We still have not made a final
decision, but the numbers may speak for
themselves. However, we have to consider the
effects on the interested parties.
FIN534_7_12_Linda-2: I guess you can say
it is a continuous learning process.
Slide
13
Scene 13
•
CYU
As part of your understanding
about Agency Conflicts, please
select all those that can be
considered potential Agency
Conflicts between managers and
shareholders
(1) Manager finds out that
company will not meet
expected earnings and put a
different spin on the earnings
so it doesn’t look as bad
(2) Manager’s best friend is part
of a division that is scheduled
to be closed but the manager
lobbies to keep it open even
though it is hurting company
profits.
(3) Manager decides to invest
extra cash in stocks or bonds
instead of giving some of the
cash back to the shareholders
(4) Manager decides to take the
entire staff on an all-inclusive
trip to Hawaii with everyone
in first class staying at the
most expensive hotel
Answer – They all can be considered
potential agency costs. Shareholders
want managers to maximize their
wealth but managers also have their
own goals which can cause conflicts.
Slide
14
Next Slide
Scene 14
•
Conference room
•
Summary Slide –
FIN534_7_14_Don-1: Wow – great
information by everyone. We first learned that
pro forma statements are an important part of
Financial Planning which includes the
Operating and Financial Plans. A lot of
research is needed in developing these
statements as company projections which then
help in establishing projected cash flows which
in turn assist in valuation projections.
We also learned about Agency conflicts. The
three typical Agency Conflicts are
stockholders versus creditors; controlling
interest owners versus non-controlling
interest owners; and stockholders versus
managers.
The conflicts can arise as profit maximization
measures may not be implemented to the
fullest due to a number of factors. Interested
parties are then faced with some decisions. If
the core values of the company are kept in
mind, this may help in the decision making
process.
FIN534_7_14_Linda-1: While we did not do
a lot of calculations this time around, we did
do a lot of examination of policies and
procedures. These are also very important
whenever we evaluate a project not to mention
one as big as this expansion project.
Slide
15
Scene 15
•
Closing slide
All of this hard work has really made me ready
to join one of those TFC Intense Exercise
classes. One of them is starting in a few
minutes. Let’s go exercise!
Closing slide
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