Investigations into possible improvements in financial planning models through structural changes

Abstract

Scope and Method of Study: This study examines the feasibility of bringing about structural changes in a corporate financial planning model. The structural changes examined relate to the predictions of company sales, dividend payout, and share price. The work described in this report uses historical data for eleven retail firms; a mix of small , medium and large firms is used. The retail industry , in general , is characterized by stable sales and earnings. Therefore, the conclusions drawn in this report may not be applicable to high growth industries, or industries with cyclic sales and earnings patterns.

Findings and Conclusions: Management can bring about structural changes in the corporate financial planning model by adhering to simple normative or prescriptive guidelines in determining the "right" type of models that are best applicable to the firm. For example, sales prediction models for retail firms based on economic indicators such as the GNP are easy to implement, and provide better forecasting methods than extrapolations from historical data. Similarly, the dividend model that assumes the same dividend in a year as in the previous year gives better results than the models assuming a constant payout ratio or a constant increase in dividend. Finally, the stock price models are probably the most difficult to construct because the correlations between per share price, dividend, earnings and the interest rate are not consistent from one firm to another.