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Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 20 Short-Term Financial Planning
20.1 Forecasting Short-Term Financing Needs
1) Cash low forecasts are conducted in order to determine whether a irm has a cash low
surplus or deicit and whether such a surplus or deicit is temporary or permanent.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Firms need short-term inancing to deal with seasonal working capital requirements,
negative cash low shocks, or positive cash low shocks.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Which of the following are the three reasons that irms need short-term inancing?
A) seasonalities, permanent working capital, and positive cash low shocks
B) seasonalities, funding risk, and permanent working capital
C) negative cash low shocks, positive cash low shocks, and seasonalities
D) permanent working capital, negative cash low shocks, and funding risk
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) Which of the following companies is most likely to have the greatest need for short-term
inancial planning?
A) a company that mines sand for use in glass-making
B) a company that manufacturers condiments such as ketchup
C) a company that produces advertisements for roadside billboards
D) a company that provides catering services for weddings
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5) Which of the following companies has the smallest need for short-term inancial
planning?
A) a company that produces Christmas decorations.
B) a toy manufacturer.
C) a company that makes condiments such as ketchup.
D) a company that provides catering services for weddings.
Dif: 1 Var: 1
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
6) How does seasonality create luctuations in a irm's net income over a year?
A) Cost of goods sold will rise and fall along with sales, while administrative and other
costs will remain relatively steady.
B) Cost of goods sold will rise when sales fall, and vice versa, while administrative and
other costs will remain relatively steady.
C) Cost of goods sold, along with administrative and other costs, will rise when sales fall,
and vice versa.
D) Cost of goods sold, along with administrative and other costs, will rise and fall along
with sales.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) A company that makes decorations for Christmas trees has high sales in its fourth
quarter but very low sales during the rest of the year. It manufactures decorations steadily
throughout the year, however. Which of the following is NOT a likely consequence of this
scenario?
A) The irm will need sources of short-term cash to fund inventory in the second and third
quarters.
B) The irm will see negative net cash lows in the second and third quarter.
C) The irm will have a large short-term surplus in the fourth quarter.
D) Accounts payables will rise from the irst to fourth quarter.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2
8)
Month J F M A M J J A S O N D
Net Income 8 5 6 6 6 6 6 6 6 42 20 7
Depreciation 2 2 1 2 2 1 2 2 2 2 2 2
Capital Expenditures 1 0 0 1 2 1 2 4 5 2 0 0
Accounts Receivable 16 2 3 2 1 1 2 1 3 18 22 12
Inventory 3 2 2 2 2 2 3 4 8 16 5 2
Accounts Payable 3 3 3 3 3 3 3 3 3 3 3 3
DressUp! is a clothing retailer specializing in costumery. The inancial forecast for a year is
shown in the table above. All igures are in thousands of dollars. During which of the
following months are the irm's working capital needs the greatest?
A) April
B) June
C) September
D) October
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
9)
Month J F M A M J J A S O N D
Net Income 8 5 6 6 6 6 6 6 6 42 20 7
Depreciation 2 2 1 2 2 1 2 2 2 2 2 2
Capital Expenditures 1 0 0 1 2 1 2 4 5 2 0 0
Accounts Receivable 16 2 3 2 1 1 2 1 3 18 22 12
Inventory 3 2 2 2 2 2 3 4 8 16 5 2
Accounts Payable 3 3 3 3 3 3 3 3 3 3 3 3
DressUp! is a clothing retailer specializing in costumery. The inancial forecast for a year is
shown in the table above. All igures are in thousands of dollars. During which of the
following months does the irm have surplus cash?
A) April
B) June
C) September
D) October
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
10) Q1: $1.8 million Q2: $2.4 million Q3: $8.4 million Q4:
$3.2 million
Azamel Cosmetics specializes in cosmetics which have high levels of UV protection. The
above igures show the anticipated sales over the next four quarters. Azamel carries
inventory equal to 30% of next quarter's sales, has accounts payable of 20% of next
quarter's sales, and accounts receivable of 25% of this quarter's sales. If its net income is
12% of sales, in which quarter will Azamel's seasonal working capital needs will be the
greatest?
A) Q1
B) Q2
C) Q3
D) Q4
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4
11) Q1: $2.0 million Q2: $0.3 million Q3: $0.4 million Q4: $4.2 million
Glenside Industries is a domestic machinery manufacturer which specializes in the
production of snowblowers. The above igures show the anticipated sales over the next four
quarters. Glenside carries inventory equal to 25% of next quarter's sales, has accounts
payable of 15% of next quarter's sales, and accounts receivable of 23% of this quarter's
sales. If its net income is 10% of sales, in which quarter is it expected that Glenside's
seasonal working capital needs will be the greatest?
A) Q1
B) Q2
C) Q3
D) Q4
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12) Occasionally, a company will encounter circumstances in which cash lows are
temporarily negative for an unexpected reason. We refer to such a situation as a ________.
A) liquidity shock
B) negative cash low shock
C) negative liquidity shock
D) cash crunch
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
5
13) When a company analyzes its short-term inancing needs, it typically examines cash
lows at ________.
A) monthly intervals
B) yearly intervals
C) quarterly intervals
D) weekly intervals
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
14) Which of the following irms is likely to have the highest short-term inancing needs?
A) a pharmaceutical manufacturer
B) a grocery store
C) an electric utility
D) a toy store
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
15) Which of the following statements is FALSE?
A) If a company anticipates an ongoing surplus of cash, it may choose to increase its
dividend payout.
B) Seasonal sales can create large short-term cash low deicits and surpluses.
C) The irst step in short-term inancial planning is to forecast the company's future net
working capital.
D) Deicits resulting from investments in long-term projects are often inanced using long-
term sources of capital, such as equity or long-term bonds.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
6
16) Which of the following statements is FALSE?
A) Firms with seasonal cash lows may ind themselves with a surplus of cash during some
months that is suicient to compensate for a shortfall during other months. However,
because of timing diferences, such irms often have short-term inancing needs.
B) A company forecasts its cash lows to determine whether it will have surplus cash or a
cash deicit for each period.
C) Positive cash low shocks cannot create short-term inancing needs.
D) When sales are concentrated during a few months, sources and uses of cash are also
likely to be seasonal.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
7
Use the table for the question(s) below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table
(in $ millions):
Quarter 1 2 3 4
Cash 605 625 175 1,000
Accounts Receivable 585 745 1,260 760
Inventory 410 540 725 375
Accounts Payable 835 910 1,055 1,145
17) In which quarter are Hasbeen's seasonal working capital needs the greatest?
A) 4
B) 2
C) 3
D) 1
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
8
18) In which quarter are Hasbeen's seasonal working capital needs the smallest?
A) 4
B) 2
C) 3
D) 1
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
9
Use the table for the question(s) below.
The quarterly working capital levels for Fancy Weddings Inc. are presented in the following
table (in $ millions):
Quarter 1 2 3 4
Cash 825 175 175 900
Accounts Receivable 585 1,245 1,760 800
Inventory 160 250 250 115
Accounts Payable 735 910 1,255 945
19) In which quarter are Fancy's seasonal working capital needs the greatest?
A) 1
B) 2
C) 3
D) 4
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
10
