Financial Management, 12e (Titman/Keown/Martin)
Chapter 17 Financial Forecasting and Planning
17.1 An Overview of Financial Planning
1) Types of plans that businesses typically use to guide their operations include
A) strategic plans.
B) long-range inancial plans.
C) short-range inancial plans.
D) all of the above.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
2) Because inancial 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 speciic issues as what sources of inancing to use.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
3) Long-term inancial plans typically encompass
A) 6 to 12 months.
B) about 5 years.
C) 5 to 10 years.
D) the entire lifecycle of the corporation.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
1
4) Strategic planning encompasses all of the following EXCEPT
A) a cash budget.
B) a description of the irm’s core competencies and activities.
C) a deinition of the irm’s customers.
D) a description of the irm’s competitors and its own competitive strengths and
weaknesses.
Question Status: Revised
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
5) Short-term inancial plans span a period of
A) up to ive years.
B) one to three years.
C) a year or less.
D) 1 month or less.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
6) Short-term inancial planning results in
A) a cash budget.
B) pro forma inancial statements.
C) a sales forecast for the next 1 to 3 years.
D) a general narrative detailing near-term scenarios.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
7) Long-term inancial planning results in
A) a cash budget.
B) pro forma inancial statements.
C) a sales forecast for the next 1 to 3 years.
D) a general narrative detailing near-term scenarios.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
8) Typical steps in the inancial planning process include
A) preparing a sales forecast.
B) analyzing cost data.
C) estimating tax expense.
D) all of the above.
Dif: 1
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
9) The inancial planning process is the responsibility of
A) inancial analysts.
B) operations staf.
C) marketing staf
D) inancial analysts, marketing staf, and operations staf interacting as a group.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
10) The key ingredient in a irm’s inancial planning is the sales forecast.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
11) Pro forma inancial statements are a required part of the irm’s tax returns.
Question Status: New question
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
3
12) One purpose of long-term inancial plans is to estimate the irm’s future capital
spending and inancing needs.
Question Status: New question
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
13) Cash budgets usually include details such as the timing of materials purchases, interest
payments, and the like.
Question Status: New question
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
14) One disadvantage of long-term plans is a loss of lexibility in responding to unexpected
events.
Question Status: New question
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
15) Long-term inancial plans require that the irm have well-deined goals and objectives.
Question Status: New question
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
16) Discuss the basic functions that budgets perform for a irm.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
4
17) What are the key questions that a strategic plan attempts to answer? How does it relate
to inancial plans?
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
18) Why is inancial planning important in a highly uncertain inancial environment.
Question Status: Previous edition
Objective: 17.1 Understand the goals of inancial planning.
Keywords: inancial planning
Principles: Principle 2: There Is a Risk-Return Tradeof
5
17.2 Developing a Long-Term Financial Plan
1) What is the most important ingredient in developing a irm’s inancial 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 irm should utilize
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
2) The percent-of-sales method can be used to forecast
A) expenses.
B) assets.
C) liabilities.
D) all of the above.
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
3) Apple Two Enterprises expects to generate sales of $5,950,000 for iscal 2014; sales
were $3,450,000 in iscal 2013. Assume the following igures for the iscal year ending
2013: cash $70,000; accounts receivable $250,000; inventory $400,000; net ixed assets
$520,000; accounts payable $235,000; and accruals $155,000. Use the percent-of-sales
method to forecast cash for the iscal year ending 2014.
A) $120,725
B) $75,003
C) $216,418
D) $319,604
Question Status: Revised
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
6
4) Which of the following statements about the percent-of-sales method of inancial
forecasting is true?
A) It is the least commonly used method of inancial forecasting.
B) It is a much more precise method of inancial 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 ixed percentage of sales.
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
5) The irst step involved in predicting inancing needs is
A) projecting the irm’s sales revenues and expenses over the planning period.
B) estimating the levels of investment in current and ixed assets that are necessary to
support the projected sales.
C) determining the irm’s inancing needs throughout the planning period.
D) none of the above.
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
6) A sales forecast for the coming year would relect
A) any past trend which is expected to continue.
B) the inluence of any events that might materially afect the past trend.
C) both A and B.
D) neither A nor B.
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
7
7) The “percentage” used in the percent-of-sales calculation can be obtained from
A) the most recent inancial 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.
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
8) Which of the following are considered to be spontaneous sources of inancing (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
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
9) Which of the following require adjustments when forecasting asset needs as a percent of
sales?
A) If assets must be purchased in large, discrete quantities
B) When the irm has excess capacity
C) When assets can be leased rather than purchased
D) Both A and B
Question Status: New question
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
8
10) The preparation of pro forma inancial statements accomplishes which of the following
objectives?
A) It allows management to pinpoint a irm’s optimal stock price.
B) It is essential if the irm 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 irm will have short-term cash surpluses.
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
11) Which of the following assumptions is not required by the percent of sales method?
A) The inventory turnover will remain constant during the forecast period.
B) The proit margin will remain constant during the forecast period.
C) Cash, as a percent of sales, will remain constant throughout the forecast period.
D) The debt to equity ratio will remain constant throughout the forecast period.
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
12) Apple Two Enterprises expects to generate sales of $5,950,000 for iscal 2014; sales
were $3,450,000 in iscal 2013. Assume the following igures for the iscal year ending
2013: cash $70,000; accounts receivable $250,000; inventory $400,000; net ixed assets
$520,000; accounts payable $235,000; and accruals $155,000. Use the percent-of-sales
method to forecast accounts payable for the iscal year ending 2014.
A) $212,036
B) $405,290
C) $619,619
D) $155,000
Question Status: Revised
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
9
13) Assume that Zybo, Inc. has sales of $10 million and inventory of $2 million. The
corporation utilizes the percent-of-sales method of inancial forecasting. If Zybo is expected
to generate sales of $14 million next year, what will the irm’s investment in inventory be?
A) $1.4 million
B) $2.0 million
C) $2.8 million
D) None of the above
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
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 inancial forecasting. If Calamar is
expected to generate sales of $9 million next year, what will the irm’s accounts payable
be?
A) $540,000
B) $450,000
C) $405,000
D) None of the above
Question Status: Previous edition
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
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 inancial forecasting. If
Hercules is expected to generate sales of $31 million next year, what will the irm’s
investment in current assets be?
A) $8.3 million
B) $4.0 million
C) $6.2 million
D) $5.0 million
Question Status: Revised
Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,
including its discretionary inancial needs.
Keywords: percent of sales method
Principles: Principle 2: There Is a Risk-Return Tradeof
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