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CHAPTER 9
PROJECTING FINANCIAL STATEMENTS
True-False Questions
F. 1. Long-term financial planning begins with a forecast of annual working
capital needs.
building value, obtaining additional financing, and examining exit
opportunities.
forecasting for early-stage ventures.
T. 4. Sales forecasts usually are based on either a single specific scenario or
weighted averages of several possible realizations.
as expected values.
primarily to forecast industry sales growth rates.
F. 7. Sales forecasting accuracy is usually highest during a venture’s startup
stage in its life cycle.
a venture’s life cycle.
progresses from the survival stage to the rapid–growth stage.
F. 9. “First–round financing” usually occurs during a venture’s rapid-growth life
cycle stage.
development stage in its life cycle.
over a specified time period.
T. 12. The rate at which a firm can grow sales based on the retention of business
profits is known as sustainable sales growth rate.
Chapter 9: Projecting Financial Statements
39
of 100%.
growth rate is equal to ROE times the retention ratio.
F. 15. The sustainable sales growth rate is equal to ROA times the retention ratio.
acquire assets necessary to support a firm’s sales growth.
from borrowing funds, may be explicit and impact AFN.
F. 18. The added costs associated with obtaining equity capital are based on
investor expected rates of return and are explicit costs which affect AFN.
financial capital needed and that funded by spontaneously generated funds and
retained earnings.
sales increases are called “spontaneously generated funds”.
F. 21. “Spontaneously generated funds” are increases in accounts receivable and
accounts payable that accompany sales increases.
spontaneously generated funds.
funds, assuming the existing ratios will not be changed.
T. 24. An increase in accounts receivable will require additional financing unless
the increase is offset by an equal decrease in another asset account.
sheet items at the same growth rate as sales.
sales forecasting method.”
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40
F. 27. The constant ratio forecasting method makes projections based on the
assumption that certain costs and some balance sheet items are best expressed
as a percentage of sales.
projected income statement and projected balance sheet.
working statement of cash flows.
Multiple-Choice Questions
firm? a. forecast future growth rates based on possible scenarios and the
probabilities of those scenarios.
b. attempt to corroborate the projected sales growth rates analyzing
both industry growth rates and the firm’s own past market share.
c. refine the sales forecast by using the sales force as a direct contact
with both existing and potential customers.
d. take into consideration the likely impact of major operating changes
within the firm on the sales forecast.
e. consider the effects of changes in the firm’s debt/equity blend on
the sales forecasts.
a. forecasting sales is the first step in creating projected financial
statements
b. financial forecasting tends to be more accurate for mature ventures
than for early-stage ventures
c. forecasting is relatively unimportant for early-stage ventures with
little historical financial data
d. a and b
e. a and c
forecasting sales?
a. seasoned financing
b. mezzanine financing
c. first round financing
d. startup financing
e. seed financing
Chapter 9: Projecting Financial Statements
41
forecasting sales?
a. rapid growth stage
b. startup stage
c. development stage
d. early–maturity stage
following life cycle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
e. early-maturity stage
a. forecasting industry sales and expressing the venture’s sales as a
percent of industry sales
b. using a “bottom–up” market-driven approach
c. extrapolating past sales
d. working with existing and potential customers
a. a simple average of a set of scenarios or possible outcomes
b. a weighted average of a set of scenarios or possible outcomes
c. the highest scenario value or outcome
d. the lowest scenario value or outcome
venture specializing in the production of durable running shoes. Lola predicts a
.2 probability of an 80% growth in sales, a .3 probability of a 60% growth in
sales, a .4 probability of a 40% growth in sales, and a .1 probability of a 10%
decrease in sales. What is the expected sales growth rate of the venture?
a. 47%
b. 49%
c. 51%
d. 53%
with the second lowest sales forecasting accuracy?
a. early-maturity
b. rapid-growth
c. survival
d. start-up
e. development
Chapter 9: Projecting Financial Statements
42
for reinvestment back into the business to support future growth can be
characterized by which of the following?
a. operating income
b. operating cash flow
c. net income
d. net cash flow
e. pre-tax income
to project financial statements?
a. forecast sales
b. forecast tax rates
c. project the income statement
d. project the balance sheet
e project the statement of cash flows
dividends, and had $2 million of equity at the beginning of the year. The
firm’s sustainable growth rate is:
a. 5%
b. 18.75%
c. 6.25%
d. 4.69%
e. none of the above
$2,000,000; the equity at the beginning of the year was $1,600,000 and
dividends paid were $80,000. What is the sustainable growth rate?
a. 5%
b. 15%
c. 6.25%
d. 4.69%
e. none of the above
a. real sales growth rate
b. sustainable sales growth rate
c. spontaneous sales growth rate
d. nominal sales growth rate
e. weighted average sales growth rate
equity (ROE) model?
Chapter 9: Projecting Financial Statements
43
a. net profit margin
b. asset turnover
c. equity multiplier
d. retention rate
common equity is $300,000, the sustainable growth rate is:
a. 33%
b. 40%
c. 50%
d. 67%
e. 75%
rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based
on beginning common equity = 2.0 times; and Retention rate = 25%.
a. 50%
b. 25%
c. 20%
d. 10%
e. 5%
based on beginning equity = 3.5 times, and a retention rate = 50%, the
sustainable growth rate would be:
a. 10%
b. 17.5%
c. 35%
d. 40%
e. 20.5%
based on beginning equity = 4.0 times, and a dividend payout ratio of 60%, the
sustainable growth rate would be:
a. 10%
b. 16%
c. 20%
d. 24%
e. 40%
based on beginning equity = 3.0 times, and a sustainable growth rate of 18%,
the retention rate would be:
a. 10%
b. 20%
Chapter 9: Projecting Financial Statements
44
c. 30%
d. 40%
e. 50%
venture’s common equity at the end of this year was $60,000, what was its
sustainable sales growth rate?
a. 5%
b. 10%
c. 15%
d. 20%
e. 25%
and ended the year at $500,000. What was its sustainable sales growth rate?
a. 5%
b. 10%
c. 15%
d. 20%
e. 25%
information: sales = $1,000,000; net income = $100,000; common equity at
the beginning of the year = $500,000; and the retention rate = 50%.
a. 10%
b. 15%
c. 20%
d. 25%
e. 30%
information: sales = $1,000,000; net income = $150,000; common equity at
the end of last year = $520,000; and the dividend payout percentage = 20%.
a. 10%
b. 16%
c. 20%
d. 24%
e. 30%
information: sustainable growth rate = 20%; net profit margin = 10%; and
asset turnover = 2 times.
a. 1.00
b. 1.25
c. 1.50
Chapter 9: Projecting Financial Statements
45
d. 1.75
e. 2.00
information: sustainable growth rate = 20%; total assets $500,000; beginning
of year common equity $200,000; and dividend payout percentage = 60%.
a. 10.0%
b. 12.5%
c. 15.0%
d. 17.5%
e. 20.0%
sales growth is called:
a. spontaneously generated funds
b. additional funds needed
c. addition in retained earnings
d. financial capital needed
increase is called:
a. spontaneously generated funds
b. additional funds needed
c. addition in retained earnings
d. financial capital needed
spontaneously generated funds and any increase in retained earnings is called:
a. spontaneously generated funds
b. additional funds needed
c. addition in retained earnings
d. financial capital needed
funds?
a. an increasing profit margin
b. a decreasing expected sales growth rate
c. an increase in accruals
d. an increasing dividend payout rate
e. a decrease in assets
from an asset base of $7 million, producing a $500,000 net income. Sales are
projected to grow at 20%, causing spontaneous liabilities to increase by
$200,000. In the most recent year, $200,000 was paid out as dividends, and
Chapter 9: Projecting Financial Statements
46
the current payout ratio will continue in the upcoming years. What is your
firm’s AFN?
a. $200,000
b. $600,000
c. $840,000
d. $960,000
e. $1,400,000
statements?
a. percent-of-sales method
b. percent-of-expenses method
c. GNP-ratio method
d. a and b
e. a, b, and c
proceed to :
a. project of the balance sheet, forecast sales.
b. forecast sales, project the income statement
c. forecast sales, project the balance sheet
d. forecast sales, project the statement of cash flows
or as a fixed dollar amount for planning purposes, the projected cash flow
statement is said to be a ________ forecasting statement.
a. dynamic
b. passive
c. conservative
d. checking