Chapter 18: Financial Modeling and Pro Forma Analysis
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1) The goal of the financial manager is to maximize the value of the shareholder’s stake in the firm.
2) Long term financial planning helps a financial manager in budgeting but has little to do with understanding
how the business operates.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
3) Long term financial planning allows a financial manager to understand the business by ________ between
sales, costs, capital investments and financing.
A) decreasing the spread between
B) identify wastage
C) identifying linkages
D) increasing the spread between
4) If a firm is planning an expansion or changes in how it manages its inventory, long term financial planning
can help determine the impact on the firm’s
A) capital investment.
B) free cash flows.
C) debt financing.
D) all of the above
5) Building a model for long–term forecasting reveals points in the future where the firm will need ________
when retained earnings are not enough to fund planned future investments.
A) mergers
B) dividend payments
C) stock dividends
D) external financing
6) Building a model for long–term forecasting reveals points in the future where the firm will have:
A) excess cash that can be used for dividends, debt repayment, or stock repurchases.
B) a need for expanding property, plant and equipment to meet increases in capacity.
C) cash needs that must be funded with external financing.
D) all of the above.
7) Forecasting a balance sheet with percent of sales method requires two passes a first pass to determine
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
8) 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 sales
C) percent of assets
D) percent of liabilities
9) While the assets and accounts payable of a firm may reasonably be expected to grow with sales, ________
will not naturally grow with sales.
A) long term debt
B) cash
C) cost of sales
D) supplier credit
10) 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 V
B) III and V
C) I, II and IV
D) I, II, and III
11) 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) $176 million
B) $160 million
C) $170 million
D) $173 million
12) 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) $84 million
B) $96 million
C) $80 million
D) $88 million
13) 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) $215 million
B) $210 million
C) $225 million
D) $230 million
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
Depreciation
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
Stockholders’
Equity
97.0
Total
Liabilities and
Equity
197.0
14) Using the percent of sales method, and assuming 20% growth in sales, estimate Billy’s Burgers’ depreciation
for 2011.
A) $20.6 million
B) $12.0 million
C) $50.8 million
D) $17.2 million
15) 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) $38.16 million
B) $23.28 million
C) $35.76 million
D) $24.84 million
16) 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) $28.16 million
B) $24.84 million
C) $23.28 million
D) $35.76 million
17) Using the percent of sales method, and assuming 20% growth in sales, estimate Billy’s Burgers’ Accounts
Receivable for 2011.
A) $18.0 million
B) $21.0 million
C) $25.2 million
D) $21.6 million
18) Using the percent of sales method, and assuming 20% growth in sales, estimate Billy’s Burgers’ Accounts
Payable for 2011.
A) $25.2 million
B) $21.6 million
C) $21.0 million
D) $18.0 million
19) ________ is the amount of additional external financing needed to fund planned increases in assets.
A) Debt issuance
B) Equity issuance
C) Preferred stock issuance
D) Net new financing
20) 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, preferred stock
B) debt, equity
C) coupons, debt
D) dividends, equity
21) The amount of dividends a company pays will affect the ________ it has to finance future growth.
A) debt
B) current liabilities
C) retained earnings
D) current ratio
22) When making long term plans, any increases in ________ and ________ reflect capital structure decisions that
require managers to actively raise capital.
A) assets, equity
B) debt, assets
C) debt, equity
D) current ratio, equity
23) A services firm does all its business in cash only. The firm projects a cash balance of $2000 in its account
after all taxes and costs are paid. The owners plan to invest $5000 and pay a dividend of $1000. How
much net new financing is needed?
A) $6000
B) $4000
C) $5000
D) $7000
24) A services firm does all its business in cash only. The firm projects a cash balance of $3000 in its account
after all taxes and costs are paid. The owners plan to invest $8000 and pay a dividend of $1000. How
much net new financing is needed?
A) $7000
B) $4000
C) $5000
D) $6000
25) A services firm does all its business in cash only. The firm projects a cash balance of $4000 in its account
after all taxes and costs are paid. The owners plan to invest $7000 and pay a dividend of $1000. How
much net new financing is needed?
A) $6000
B) $7000
C) $4000
D) $5000
26) 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 financing is needed in the following year?
A) $22 million
B) $18 million
C) $30 million
D) $25 million
27) LG Inc. has done a long–term forecast of its balance sheet. The projected total assets for the next year are
$300 million. The current liabilities are projected to be $170 million and other long term liabilities are $70
million. How net new financing is needed in the following year?
A) $60 million
B) $65 million
C) $70 million
D) $58 million
28) LG Inc. has done a long–term forecast of its balance sheet. The projected total assets for the next year are
$100 million. The current liabilities are projected to be $40 million and other long term liabilities are $30
million. How much net new financing is needed in the following year?
A) $30 million
B) $25 million
C) $22 million
D) $18 million
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
29) What is net new financing?
30) How do we compute net new financing?
31) What is common starting point for forecasting?
32) What is the implied assumption in percent of sales method?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
33) One of the shortcomings of the percent of sales method is that it does not account for the fact that capacity
changes are lumpy and not incremental.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
34) The percent of sales method relies on the idea that capacity increases are ________ ,even though in practice
such increases are ________.
A) lumpy, lumpy
B) incremental, lumpy
C) lumpy, incremental
D) incremental, incremental
35) The market size for Loppins is 60 million units. If SPI Inc. has a market share of 20% and the average sales
price is $3 per Loppin, what is the dollar amount of sales of SPI?
A) $38 million
B) $42 million
C) $32 million
D) $36 million
36) The market size for Loppins is 80 million units. If SPI Inc. has a market share of 30% and the average sales
price is $2 per Loppin, what is the dollar amount of sales of SPI?
A) $40 million
B) $42 million
C) $48 million
D) $45 million
37) The market size for Loppins is 40 million units. If SPI Inc. has a market share of 40% and the average sales
price is $3 per Loppin, what is the dollar amount of sales of SPI?
A) $62 million
B) $58 million
C) $48 million
D) $32 million
38) When the projected liabilities and equity are greater than the assets, the firm can plan to
A) retire debt.
B) retain extra cash.
C) pay dividends.
D) all of the above
Use the table for the question(s) below.
Ideko Sales and Operating Cost Assumptions
Year
2005
2006
2008
2010
Sales Data
Growth/Year
1 Market Size (000 units)
5.0%
10,000
10,500
11,576
12,763
2 Market Share
1.0%
10.0%
11.0%
13.0%
15.0%
3 Average Sales Price
($/unit)
2.0%
75.00
76.50
79.59
82.81
Cost of Goods Data
4 Raw Materials ($/unit)
1.0%
16.00
16.16
16.48
16.82
5 Direct Labor Costs
($/unit)
4.0%
18.00
18.72
20.25
21.90
Operating Expense
and Tax Data
6 Sales and Marketing
(% sales)
15.0%
16.5%
19.5%
20.0%
7 Administrative (% sales)
18.0%
15.0%
14.0%
13.0%
8 Tax Rate
35.0%
35.0%
35.0%
35.0%
39) Based upon Ideko’s Sales and Operating Cost Assumptions, what production capacity will Ideko require in
2009?
A) 1914 units
B) 1702 units
C) 1115 units
D) 1323 units
E) 1505 units
40) Based upon Ideko’s Sales and Operating Cost Assumptions, what production capacity will Ideko require in
2007?
A) 1702 units
B) 1505 units
C) 1914 units
D) 1323 units
E) 1115 units
41) Based upon Ideko’s Sales and Operating Cost Assumptions, what production capacity will Ideko require in
2008?
A) 1914 units
B) 1505 units
C) 1702 units
D) 1323 units
E) 1115 units
Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2010–2015
Year
2010
2011
2012
2013
2014
2015
Income Statement ($ 000)
1 Sales
75,000
88,358
103,234
119,777
138,149
158,526
2 Cost of Goods Sold
3 Raw Materials
(16,000)
(18,665)
(21,593)
(24,808)
(28,333)
(32,193)
4 Direct Labor Costs
(18,000)
(21,622)
(25,757)
(30,471)
(35,834)
(41,925)
5 Gross Profit
41,000
48,071
55,883
64,498
73,982
84,407
6 Sales and Marketing
(11,250)
(14,579)
(18,582)
(23,356)
(27,630)
(31,705)
7 Administrative
(13,500)
(13,254)
(15,485)
(16,769)
(17,959)
(20,608)
8 EBITDA
16,250
20,238
21,816
24,373
28,393
32,094
9 Depreciation
(5,500)
(5,450)
(5,405)
(6,865)
(7,678)
(7,710)
10 EBIT
10,750
14,788
16,411
17,508
20,715
24,383
11 Interest Expense (net)
(75)
(6,800)
(6,800)
(6,800)
(7,820)
(8,160)
12 Pretax Income
10,675
7,988
9,611
10,708
12,895
16,223
13 Income Tax
(3,736)
(2,796)
(3,364)
(3,748)
(4,513)
(5,678)
14 Net Income
6,939
5,193
6,247
6,960
8,382
10,545
Pro Forma Balance Sheet for Ideko, 2010–2015
Year
2010
2011
2012
2013
2014
2015
Balance Sheet ($ 000)
Assets
1 Cash and Cash Equivalents
6,164
7,262
8,485
9,845
11,355
13,030
2 Accounts Receivable
18,493
14,525
16,970
19,689
22,709
26,059
3 Inventories
6,165
6,501
7,613
8,854
10,240
11,784
4 Total Current Assets
30,822
28,288
33,067
38,388
44,304
50,872
5 Property, Plant, and
Equipment
49,500
49,050
48,645
61,781
69,102
69,392
6 Goodwill
72,332
72,332
72,332
72,332
72,332
72,332
7 Total Assets
152,654
149,670
154,044
172,501
185,738
192,597
Liabilities
8 Accounts Payable
4,654
5,532
6,648
7,879
9,110
10,448
9 Debt
100,000
100,000
100,000
115,000
120,000
120,000
10 Total Liabilities
104,654
105,532
106,648
122,879
129,110
130,448
Stockholders’ Equity
11 Starting Stockholders’ Equity
48,000
44,138
47,396
49,621
56,628
12 Net Income
5,193
6,247
6,960
8,382
10,545
13 Dividends
(2,000)
(9,055)
(2,989)
(4,735)
(1,375)
(5,024)
14 Capital Contributions
50,000
—
—
—
—
—
15 Stockholders’ Equity
48,000
44,138
47,396
49,621
56,628
62,149
16 Total Liabilities and Equity
152,654
149,670
154,044
172,501
185,738
192,597
42) The amount of net working capital for Ideko in 2010 is closest to:
A) $29,420
B) $26,200
C) $35,195
D) $30,510
43) The amount of net working capital for Ideko in 2011 is closest to:
A) $35,195
B) $22,750
C) $28,170
D) $30,510
44) The amount of net working capital for Ideko in 2012 is closest to:
A) $35,195
B) $22,170
C) $42,420
D) $26,420
45) The amount of the decrease in net working capital for Ideko in 2011 is closest to:
A) $5230
B) $4685
C) $3410
D) $4090
46) The amount of the increase in net working capital for Ideko in 2012 is closest to:
A) $4,920
B) $4,685
C) $5,230
D) $3,665
47) With the proper changes it is believed that Ideko‘s credit policies will allow for an account receivables days
of 60. The forecasted accounts receivable for Ideko in 2012 is closest to:
A) $22,710
B) $14,525
C) $16,970
D) $19,690
48) With the proper changes it is believed that Ideko’s credit policies will allow for an account receivables days
of 60. The forecasted accounts receivable for Ideko in 2013 is closest to:
A) $14,525
B) $19,690
C) $16,970
D) 22,710
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
49) What is minimum required cash?
50) What are a firm’s options when it generates more cash than planned?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
51) The maximum growth rate that a firm can achieve without issuing new equity or by increasing its debt to
equity ratio is the firm’s sustainable growth rate.
52) Internal growth rate indicates whether a planned investment will increase or decrease firm value.
53) The sustainable growth rate assumes that the firm will raise no new debt financing.
54) Internal growth rate assumes that the firm can finance investments via sale of debt.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
55) ________ is the maximum growth rate a firm can achieve without resorting to external financing.
A) Sustainable growth rate
B) Return on equity
C) Internal growth rate
D) Retention rate
56) A firm has $50 million in equity and $20 million of debt, it pays dividends of 30% of net income, and has a
net income of $10 million. What is the firm’s internal growth rate?
A) 12%
B) 11%
C) 10%
D) 9%
57) A firm has $40 million in equity and $20 million of debt, it pays dividends of 20% of net income, and has a
net income of $10 million. What is the firm’s internal growth rate?
A) 15.2%
B) 12.2%
C) 14.1%
D) 13.3%
58) A firm has $70 million in equity and $30 million of debt, it pays dividends of 30% of net income, and has a
net income of $10 million. What is the firm’s internal growth rate?
A) 9%
B) 6%
C) 7%
D) 8%
59) A firm has $20 million in equity and $20 million of debt, it pays dividends of 20% of net income, and has a
net income of $5 million. What is the firm’s sustainable growth rate?
A) 19%
B) 21%
C) 20%
D) 18%
60) A firm has $50 million in equity and $20 million of debt, it pays dividends of 30% of net income, and has a
net income of $10 million. What is the firm’s sustainable growth rate?
A) 15%
B) 13%
C) 14%
D) 12%