Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 18 Financial Modeling and Pro Forma Analysis
18.1 Goals of Long-Term Financial Planning
1) The goal of the inancial manager is to maximize the value of the shareholders’ stake in
the irm.
AACSB Objective: Analytic Skills
Author: KB
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2) Long term inancial planning helps a inancial manager in budgeting but has little to do
with understanding how the business operates.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) Long term inancial planning allows a inancial manager to understand the business by
________ between sales, costs, capital investments and inancing.
A) increasing the spread between
B) identifying linkages
C) decreasing the spread between
D) identify wastage
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Author: KB
Question Status: Previous Edition
4) If a irm is planning an expansion or changes in how it manages its inventory, long term
inancial planning can help determine the impact on the irm’s ________.
A) debt inancing
B) capital investment
C) free cash lows
D) all of the above
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Author: KB
Question Status: Previous Edition
5) Building a model for long-term forecasting reveals points in the future where the irm
will need ________ when retained earnings are not enough to fund planned future
investments.
A) external inancing
B) stock dividends
C) dividend payments
1
D) mergers
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) Building a model for long-term forecasting reveals points in the future where the irm
will have ________.
A) excess cash that can be used for dividends, debt repayment, or stock repurchases
B) cash needs that must be funded with external inancing
C) a need for expanding property, plant and equipment to meet increases in capacity
D) all of the above
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Author: JP
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18.2 Forecasting Financial Statements: The Percent of Sales Method
1) Forecasting a balance sheet with percent of sales method requires two passes—a irst
pass to determine inancing needs and a second pass that shows the sources and amounts
of inancing.
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Author: KB
Question Status: Previous Edition
2
2) The ________ method assumes that as sales grow, many income statement and balance
sheet items will grow, remaining the same percent of sales.
A) percent of income
B) percent of liabilities
C) percent of sales
D) percent of assets
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Author: KB
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3) While the assets and accounts payable of a irm may reasonably be expected to grow
with sales, ________ will not naturally grow with sales.
A) cash
B) supplier credit
C) long term debt
D) cost of sales
AACSB Objective: Analytic Skills
Author: KB
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4) Which of the following accounts may reasonably be expected to grow with sales?
I. Accounts Receivable
II. Accounts Payable
III. Property, Plant and Equipment
IV. Inventory
V. Long-Term Debt
A) I, II, and III
B) I, II, and V
C) I, II and IV
D) III and V
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
3
5) Calgary Doughnuts had sales of $200 million in 2007. Its cost of sales were $160 million.
If sales are expected to grow at 10% in 2008, compute the forecasted costs using the
percent of sales method.
A) $160 million
B) $170 million
C) $173 million
D) $176 million
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) Calgary Doughnuts had sales of $100 million in 2007. Its cost of sales were $70 million.
If sales are expected to grow at 20% in 2008, compute the forecasted costs using the
percent of sales method.
A) $80 million
B) $84 million
C) $88 million
D) $96 million
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4
7) Calgary Doughnuts had sales of $300 million in 2007. Its cost of sales were $200 million.
If sales are expected to grow at 15% in 2008, compute the forecasted costs using the
percent of sales method.
A) $210 million
B) $215 million
C) $225 million
D) $230 million
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
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Use the information about Billy’s Burgers to answer the following question(s):
Billy’s Burgers
Figures in $
millions
Income
Statement 2010
Balance
Sheet 2010
Net Sales 246.0 Assets
Costs exc.
Dep. 187.0 Cash 8.0
EBITDA 59.0 Accts. Rec. 21.0
Depreciatio
n 17.2 Inventories 23.0
EBIT 41.8
Total
Current
Assets 52.0
Interest 12.0 Net PP&E 145.0
Pretax
Income 29.8 Total Assets 197.0
Taxes 10.4
Net Income 19.4
Liabilities
and Equity
Accts.
Payable 18.0
Long-Term
Debt 82.0
Total
Liabilities 100.0
Total
Stockholder
s’ Equity 97.0
Total
Liabilities
and Equity 197.0
8) Using the percent of sales method, and assuming 20% growth in sales, estimate Billy’s
Burgers’ depreciation for 2011.
A) $17.2 million
B) $50.8 million
C) $12.0 million
D) $20.6 million
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
6
9) Using the percent of sales method, and assuming 20% growth in sales and no change in
interest expense, estimate Billy’s Burgers‘ Pretax Income for 2011.
A) $23.28 million
B) $35.76 million
C) $24.84 million
D) $38.16 million
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
10) Using the percent of sales method, and assuming 20% growth in sales and no change in
interest expense, estimate Billy’s Burgers‘ Net Income for 2011.
A) $23.28 million
B) $35.76 million
C) $24.84 million
D) $28.16 million
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
11) Using the percent of sales method, and assuming 20% growth in sales, estimate Billy‘s
Burgers’ Accounts Receivable for 2011.
A) $21.0 million
B) $25.2 million
C) $18.0 million
D) $21.6 million
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
7
12) Using the percent of sales method, and assuming 20% growth in sales, estimate Billy‘s
Burgers’ Accounts Payable for 2011.
A) $21.0 million
B) $25.2 million
C) $18.0 million
D) $21.6 million
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
13) ________ is the amount of additional external inancing needed to fund planned
increases in assets.
A) Net new inancing
B) Equity issuance
C) Debt issuance
D) Preferred stock issuance
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Author: KB
Question Status: Previous Edition
14) The asset and liability side of a pro forma balance sheet projection will not balance, in
general, unless we make assumptions about how ________ and ________ will grow with sales.
A) dividends, equity
B) coupons, debt
C) debt, equity
D) dividends, preferred stock
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Author: KB
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15) The amount of dividends a company pays will afect the ________ it has to inance future
growth.
A) debt
B) retained earnings
C) current liabilities
D) current ratio
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Author: KB
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16) When making long term plans, any increases in ________ and ________ relect capital
structure decisions that require managers to actively raise capital.
A) debt, equity
B) debt, assets
C) assets, equity
D) current ratio, equity
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Author: KB
Question Status: Previous Edition
17) A services irm does all its business in cash only. The irm projects a cash balance of
$2,000 in its account after all taxes and costs are paid. The owners plan to invest $5,000
and pay a dividend of $1000. How much net new inancing is needed?
A) $4,000
B) $5,000
C) $6,000
D) $7,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
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18) A services irm does all its business in cash only. The irm projects a cash balance of
$3,000 in its account after all taxes and costs are paid. The owners plan to invest $8,000
and pay a dividend of $1000. How much net new inancing is needed?
A) $4,000
B) $5,000
C) $6,000
D) $7,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
19) A services irm does all its business in cash only. The irm projects a cash balance of
$4,000 in its account after all taxes and costs are paid. The owners plan to invest $7,000
and pay a dividend of $1,000. How much net new inancing is needed?
A) $4,000
B) $5,000
C) $6,000
D) $7,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
20) LG Inc. has done a long-term forecast of its balance sheet. The projected total assets
for the next year are $200 million. The current liabilities are projected to be $100 million
and other long term liabilities are $70 million. How much net new inancing is needed in
the following year?
A) $18 million
B) $22 million
C) $25 million
D) $30 million
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
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