978-0132757089 Chapter 17 Part 1

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Financial Management: Principles and Applications, 11e (Titman)

Chapter 17 Financial Forecasting and Planning

1) Types of plans that businesses typically use to guide their operations include:

A) strategic plans.

B) long-range financial plans.

C) short-range financial plans.

D) all of the above.

Topic: 17.1 An Overview of Financial Planning

Keywords: financial planning

Principles: Principle 3: Cash Flows Are the Source of Value

2) Because financial planning usually takes place in a highly uncertain environment,

A) it is rarely worth the time and expense.

B) time horizons should be limited to a few months.

C) it is important to develop contingency plans to respond to unexpected events.

D) it should avoid such specific issues as what sources of financing to use.

Topic: 17.1 An Overview of Financial Planning

Keywords: financial planning

Principles: Principle 3: Cash Flows Are the Source of Value

3) Long-term financial plans typically encompass:

A) 6 to 12 months.

B) about 5 years.

C) 5 to 10 years.

D) the entire lifecycle of the corporation.

Topic: 17.1 An Overview of Financial Planning

Keywords: long-term financial plans

Principles: Principle 3: Cash Flows Are the Source of Value

4) Strategic planning encompasses all of the following EXCEPT:

A) a cash budget.

B) a description of the firm’s core competencies and activities.

C) a definition of the firm’s customers.

D) a description of the firm’s competitors and its own competitive strengths and weaknesses.

Topic: 17.1 An Overview of Financial Planning

Keywords: long-term financial plans

Principles: Principle 3: Cash Flows Are the Source of Value

5) Short-term financial plans span a period of:

A) up to five years.

B) one to three years.

C) a year or less.

D) 1 month or less.

Topic: 17.1 An Overview of Financial Planning

Keywords: short-term financial plans

Principles: Principle 3: Cash Flows Are the Source of Value

6) Short-term financial planning results in:

A) a cash budget.

B) pro forma financial statements.

C) a sales forecast for the next 1 to 3 years.

D) a general narrative detailing near-term scenarios.

Topic: 17.1 An Overview of Financial Planning

Keywords: short-term financial plans

Principles: Principle 3: Cash Flows Are the Source of Value

7) Long-term financial planning results in:

A) a cash budget.

B) pro forma financial statements.

C) a sales forecast for the next 1 to 3 years.

D) a general narrative detailing near-term scenarios.

Topic: 17.1 An Overview of Financial Planning

Keywords: long-term financial plans

Principles: Principle 3: Cash Flows Are the Source of Value

8) Typical steps in the financial planning process include:

A) preparing a sales forecast.

B) analyzing cost data.

C) estimating tax expense.

D) all of the above.

Topic: 17.1 An Overview of Financial Planning

Keywords: financial planning

Principles: Principle 3: Cash Flows Are the Source of Value

9) The financial planning process is the responsibility of:

A) financial analysts.

B) operations staff.

C) marketing staff

D) financial analysts, marketing staff, and operations staff interacting as a group.

Topic: 17.1 An Overview of Financial Planning

Keywords: financial planning

Principles: Principle 3: Cash Flows Are the Source of Value

10) The key ingredient in a firm’s financial planning is the sales forecast.

Topic: 17.1 An Overview of Financial Planning

Keywords: financial planning

Principles: Principle 3: Cash Flows Are the Source of Value

11) Discuss the basic functions that budgets perform for a firm.

Topic: 17.1 An Overview of Financial Planning

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

12) What are the key questions that a strategic plan attempts to answer? How does it relate to

financial plans?

Topic: 17.1 An Overview of Financial Planning

Keywords: financial planning

Principles: Principle 3: Cash Flows Are the Source of Value

13) Why is financial planning important in a highly uncertain financial environment.

Topic: 17.1 An Overview of Financial Planning

Keywords: financial planning

Principles: Principle 3: Cash Flows Are the Source of Value

1) What is the most important ingredient in developing a firm’s financial plan?

A) A forecast of sales revenues

B) Determining the amount of dividends to pay shareholders

C) Projecting the rate of interest on proposed new debt

D) Deciding upon which method of depreciation a firm should utilize

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: sales forecast

Principles: Principle 3: Cash Flows Are the Source of Value

2) The percent–of-sales method can be used to forecast:

A) expenses.

B) assets.

C) liabilities.

D) all of the above.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

3) Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002; sales were

$3,450,000 in fiscal 2001. Assume the following figures for the fiscal year ending 2001: cash

$70,000; accounts receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts

payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast cash for

the fiscal year ending 2002.

A) $120,725

B) $75,003

C) $216,418

D) $319,604

Topic: 17.3 Developing a Short-Term Financial Plan

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

4) Which of the following statements about the percent-of-sales method of financial forecasting

is true?

A) It is the least commonly used method of financial forecasting.

B) It is a much more precise method of financial forecasting than a cash budget would be.

C) It involves estimating the level of an expense, asset, or liability for a future period as a percent

of the forecast for sales revenues.

D) It projects all liabilities as a fixed percentage of sales.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

5) The first step involved in predicting financing needs is:

A) projecting the firm’s sales revenues and expenses over the planning period.

B) estimating the levels of investment in current and fixed assets that are necessary to support the

projected sales.

C) determining the firm’s financing needs throughout the planning period.

D) none of the above.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: sales forecast

Principles: Principle 3: Cash Flows Are the Source of Value

6) A sales forecast for the coming year would reflect:

A) any past trend which is expected to continue.

B) the influence of any events that might materially affect the past trend.

C) both A and B.

D) neither A nor B.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: sales forecast

Principles: Principle 3: Cash Flows Are the Source of Value

7) The “percentage” used in the percent-of-sales calculation can be obtained from:

A) the most recent financial statement item as a percent of current sales.

B) an average computed over several years.

C) an analyst’s judgment.

D) all of the above.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

8) Which of the following are considered to be spontaneous sources of financing (i.e., they arise

naturally during the course of doing business)?

A) Notes payable and common stock

B) Accounts receivable and bonds

C) Fixed assets and inventory

D) Accounts payable and accrued expenses

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: spontaneous financing sources

Principles: Principle 3: Cash Flows Are the Source of Value

9) Under which of the following conditions would the percent-of-sales method of financial

forecasting be most accurate?

A) If assets must be purchased in discrete quantities

B) When asset requirements can be accurately forecasted as a constant percent of sales

C) If economic circumstances beyond a firm’s control drastically change from one year to the

D) When economies of scale can be realized from investing in specific assets

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

10) The preparation of pro forma financial statements accomplishes which of the following

objectives?

A) It allows management to pinpoint a firm’s optimal stock price.

B) It is essential if the firm is to accurately estimate its weighted average cost of capital.

C) It assists management in making decisions with respect to raising the capital that is needed for

growth.

D) It pinpoints periods when the firm will have short-term cash surpluses.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: pro forma financial statements

Principles: Principle 3: Cash Flows Are the Source of Value

11) The percent-of-sales method of forecasting makes which of the following assumptions?

A) The inventory turnover will remain the same during the forecast period.

B) The profit margin will remain constant during the forecast period.

C) Cash, as a percent of sales, will remain constant throughout the forecast period.

D) All of the above.

E) None of the above.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

12) Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002; sales were

$3,450,000 in fiscal 2001. Assume the following figures for the fiscal year ending 2001: cash

$70,000; accounts receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts

payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast accounts

payable for the fiscal year ending 2002.

A) $212,036

B) $405,290

C) $619,619

D) $155,000

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

13) Assume that Zybo, Inc. has sales of $10 million and inventory of $2 million. The corporation

utilizes the percent-of-sales method of financial forecasting. If Zybo is expected to generate sales

of $14 million next year, what will the firm’s investment in inventory be?

A) $1.4 million

B) $2.0 million

C) $2.8 million

D) None of the above

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

14) Assume that Calamar Corp. has sales of $7.5 million and accounts payable of $450,000. The

corporation utilizes the percent-of-sales method of financial forecasting. If Calamar is expected

to generate sales of $9 million next year, what will the firm’s accounts payable be?

A) $540,000

B) $450,000

C) $405,000

D) None of the above

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

15) Assume that Hercules Manufacturing has sales of $25 million and current assets of $5

million. The corporation utilizes the percent-of-sales method of financial forecasting. If Hercules

is expected to generate sales of $31 million next year, what will the firm’s investment in current

assets be?

A) $8.3 million

B) $4.0 million

C) $6.2 million

D) $5.0 million

E) None of the above

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

16) Assume that Helaron, Inc. has sales of $83 million and fixed assets of $22.4 million. The

corporation utilizes the percent-of-sales method of financial forecasting. If Helaron is expected

to generate sales of $94 million next year, what will the firm’s investment in fixed assets be?

A) $19.8 million

B) $28.8 million

C) $16.2 million

D) $25.4 million

E) None of the above

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

17) Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002; sales were

$3,450,000 in fiscal 2001. Assume the following figures for the fiscal year ending 2001: cash

$70,000; accounts receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts

payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast accruals

for the fiscal year ending 2002.

A) $890,001

B) $412,316

C) $267,319

D) $350,814

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

18) The percent–of-sales method of forecasting makes which of the following assumptions?

A) That some assets do not increase in direct proportion to an increase in sales.

B) The accounts receivable average collection period will remain constant throughout the

forecast period.

C) The firm may acquire some “lumpy” assets.

D) All of the above.

E) None of the above.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: percent of sales method

Principles: Principle 3: Cash Flows Are the Source of Value

19) Marjen Manufacturing has purchases equal to 40% of sales. They purchase one month prior

to sales and pay one month after sales. Given the following sales forecast, calculate Marjen’s

payments for March.

Projected Sales

January $80,000

February $100,000

March $120,000

A) $40,000

B) $60,000

C) $80,000

D) $100,000

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

20) Spontaneous sources of financing include:

A) accounts payable and accrued expenses.

B) notes payable and mortgages payable.

C) long-term debt and capital leases.

D) common stock and paid-in capital.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: spontaneous financing sources

Principles: Principle 3: Cash Flows Are the Source of Value

21) Which of the following is the correct method of determining discretionary financing needed

(DFN)?

A) Projected change in assets, divided by projected change in liabilities, plus projected change in

owner’s equity

B) Projected change in assets, times projected change in owner’s equity, minus projected change

in liabilities

C) Projected change in owner’s equity, minus projected change in liabilities, plus projected

change in assets

D) Projected change in assets, minus projected change in liabilities, minus projected change in

owner’s equity

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: discretionary financing needs (DFN)

Principles: Principle 3: Cash Flows Are the Source of Value

22) A discretionary form of financing would be:

A) notes payable.

B) accounts payable.

C) accrued expenses.

D) none of the above.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: discretionary financing needs (DFN)

Principles: Principle 3: Cash Flows Are the Source of Value

23) An increase in projected ________ will increase discretionary funds needed.

A) cash dividends

B) sales

C) retained earnings

D) both A and B

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: discretionary financing needs (DFN)

Principles: Principle 3: Cash Flows Are the Source of Value

24) Assume all else remains the same. Which of the following statements is true?

A) The lower the dividend payout, the less a firm will have to reinvest.

B) The higher the dividend payout, the more discretionary financing a firm will require.

C) The lower the dividend payout, the more discretionary financing a firm will require.

D) The higher the dividend payout, the higher the retention percentage.

Topic: 17.2 Developing a Long-Term Financial Plan

Keywords: discretionary financing needs (DFN)

Principles: Principle 3: Cash Flows Are the Source of Value