Chapter 15—Financial Planning
MULTIPLE CHOICE
1. A sales forecast that relies heavily on macroeconomic and industry forecasts is called a
a.
top-down forecast
b.
bottom-up forecast
c.
plug figure
d.
none of the above
2. The short-term financing strategy where a company relies heavily on short term borrowing to finance a
portion of their long term growth is called a(n)
a.
conservative strategy
b.
aggressive strategy
c.
matching strategy
d.
growth strategy
3. The statement of the firm’s planned inflows and outflows of cash is called a(n)
a.
income statement
b.
balance sheet
c.
cash budget
d.
none of the above
4. The growth rate at which a company can grow without issuing new shares of common stock while
maintaining a constant total asset turnover and equity multiplier is called a(n)
a.
internal growth rate
b.
sustainable growth rate
c.
optimal growth rate
d.
maximal growth rate
5. The method in which pro forma statements are constructed by assuring that all items grow in
proportion to sales is called the
a.
percentage of sales method
b.
common size method
c.
sales dilution method
d.
sales receipt method
NARRBEGIN: EFN 1
Smith Enterprises
Balance Sheet
Current Assets
$400
Accounts Payable
$145
Fixed Assets
500
Long-term Debt
455
Equity
300
Total
$900
Total
900
Income Statement for End of Year
Sales
$450
Costs
180
Taxable Inc.
270
Tax (at 34%)
92
Net Income
178
NARREND
6. Using the percentage of sales method what will be Smith’s net income if sales are expected to increase
by 25%?
a.
$222.75
b.
$562.50
c.
$225.00
d.
$337.50
7. If Smith pays out 25% of their projected net income as dividends, what will be the company’s addition
to retained earnings, if sales grow by 25% and all items on the income statement grow proportionally
with sales?
a.
$222.75
b.
$55.68
c.
$167.07
d.
$107.25
8. What is Smith’s sustainable growth rate if the company has a dividend payout ratio of 75%?
a.
21.70%
b.
25.00%
c.
17.44%
d.
13.58%
9. If Smith pays out 75% of net income as dividends and sales are expected to grow by 25%, what are the
external funds required?
a.
$133.06
b.
$66.88
c.
$121.88
d.
$225.58
10. If sales are expected to grow at 15% what are Smith’s retained earnings next year? Assume a constant
profit margin and a dividend payout ratio of 50%.
a.
$123.05
b.
$246.10
c.
$213.99
d.
$102.47
NARRBEGIN: Cash Budget
Bavarian Brew’s schedule of projected cash disbursement
Jan
Feb
Mar
Apr
Sales
$510
$870
$450
$600
All of Bavarian Brew’s sales are credit sales. The company collects 60% of its sales in the next month
and the remainder in the month after that.
NARREND
11. What are Bavarian Brew’s cash collections in March?
a.
$726
b.
$654
c.
$324
d.
$522
12. What is the value of Bavarian Brew’s receivables account at the end of February?
a.
$1074
b.
$306
c.
$204
d.
$348
13. What are the Bavarian Brew’s cash collections in April?
a.
$528
b.
$618
c.
$702
d.
$835
14. What is the value of Bavarian Brew’s receivables at the end of April?
a.
$780
b.
$180
c.
$600
d.
$270
15. Due to a change in economic conditions Bavarian Brew will only be able to collect 40% of its March
sales in April. What is the effect on the company’s cash receipts in April as a result of this change?
a.
cash receipts decline by $180
b.
cash receipts decline by $90
c.
cash receipts increase by $270
d.
cash receipts increase by $90
NARRBEGIN: Cash disbursements
Bavarian Brew’s schedule of projected cash disbursement
Jan
Feb
Mar
Apr
Sales
$510
$870
$450
$600
The company’s purchases are 75% of its sales. Of those purchases 15% are paid in cash, 50% are paid
in the following month and the remainder in the month after that. The company’s wages and salaries
equal 15% of sales each month plus $50. Taxes of $125 are due in April. The company is going to
purchase new machinery worth $1000 in March and pay 50% right away and the rest in April. In
addition, the company will pay a $175 dividend in February.
NARREND
16. What are the cash disbursements for February? Assume Bavarian Brew had sales of $490 in
December.
a.
$598.25
b.
$773.25
c.
$548.25
d.
$419.65
17. What is the value of the Bavarian Brew’s accounts payable at the end of February? Assume the
company had sales of $490 in December.
a.
$688.50
b.
$738.50
c.
$638.50
d.
$869.00
18. What are Bavarian Brew’s cash disbursements in April?
a.
$1,1046.63
b.
$729.63
c.
$679.63
d.
$1,229.63
19. What is the value of Bavarian Brew’s accounts payable at the end of April?
a.
$346.63
b.
$500.63
c.
$1,000.63
d.
$754.63
20. What is the value of Bavarian Brew’s accounts payable at the end of March?
a.
$515.25
b.
$755.25
c.
$1,515.25
d.
$1,015.25
21. What are Bavarian Brew’s cash disbursements in March?
a.
$1,128.25
b.
$510.75
c.
$750.75
d.
$1,260.75
NARRBEGIN: Total cash budget
Bavarian Brew’s schedule of projected cash disbursement
22. If Bavarian Brew starts the year with a cash balance of $500, what is the cash balance at the end of
January? Assume that December sales were $450 and November sales were $550.
a.
$483
b.
$493
c.
$497
d.
$500
23. What is Bavarian Brew’s expected net cash flow in March?
a.
-$402.25
b.
$402.25
c.
$726
d.
-$1,128.25
24. If the cash balance at the beginning of March is $250, what is Bavarian Brew’s cash balance at the end
of the month?
a.
$250
b.
-$152.25
c.
$652.25
d.
-$652.25
25. Due to a change in economic conditions Bavarian Brew will only be able to collect 40% of its March
sales in April. What is company’s cash net cash flow in April as a result of this change?
a.
$528
b.
$1229.63
c.
-$701.63
d.
$701.63
26. Which of the following most likely is not a question asked in long-term financial planning?
a.
What threats to our current business exist?
b.
What is (are) our core competency(ies)?
c.
Can we do better by leaving markets (selling assets) and investing elsewhere?
d.
Should we acquire new vending machines for the employees’ breakrooms?
27. A firm can grow more rapidly if (consider each in isolation):
a.
it pays larger dividends.
b.
it uses less debt.
c.
its asset to sales ratio is larger.
d.
its profit margin is larger.
28. The rate at which a firm can grow without issuing any new shares of stock while keeping its dividend
policy, financial policy, and profitability constant is the
a.
optimal growth rate
b.
marginal growth rate
c.
sustainable growth rate
d.
theoretical growth rate
29. Suppose a firm forecasts sales growth larger than its sustainable growth rate, but plans to add fewer
assets than the current asset to sales ratio implies. If other aspects of the firm’s performance remain
constant, the pro forma external funds required (EFR)
a.
will likely be larger than the sustainable growth rate implies.
b.
will likely be smaller than the sustainable growth rate implies.
c.
will likely be the same as the sustainable growth rate implies.
d.
cannot be determined from this information.
30. Suppose a firm experiences a seasonal pattern in its sales, in addition to a long-term upward trend.
Which of the following financing plans has the potential to be less costly to the firm?
a.
a conservative strategy
b.
an aggressive strategy
c.
a matching strategy
d.
they are equally likely to be low-cost
31. Suppose a firm experiences a seasonal pattern in its sales, in addition to a long-term upward trend.
Which of the following financing plans has the potential to be less risky to the firm?
a.
a conservative strategy
b.
an aggressive strategy
c.
a matching strategy
d.
They are equally likely to be low-risk.
32. DigIt! Corporation has the following financial information: its profit margin is 10%, its total asset
turnover is 1.75, its assets to equity ratio is 1.5, and it pays out 35% of its earnings in dividends. What
is its sustainable growth rate?
a.
22.10%
b.
20.57%
c.
9.75%
d.
47.39%
33. DigIt! Corporation has the following financial characteristics: its profit margin is 10%, its total asset
turnover is 1.75, its asset to equity ratio is 1.5 and its sustainable growth rate is 20.6%. What dividend
payout ratio is consistent with these values?
a.
45%
b.
55%
c.
65%
d.
35%
34. Big Deal, Inc. wants to grow 30% next year. If it maintains its 40% dividend payout ratio, liabilities to
equity ratio of 1, and total asset turnover of 2, what must its profit margin be to achieve this growth?
a.
9.6%
b.
25.8%
c.
38.5%
d.
51.2%
35. If a company has a liabilities to equity ratio of 0.5, then its assets to equity ratio is
a.
0.5
b.
1.0
c.
1.5
d.
2.0
36. MoMoney Co. wants to increase its sustainable growth rate to 10%. If it maintains its 15% profit
margin, 25% retention ratio, and 0.25 liabilities to equity ratio, what must its total asset turnover value
be?
a.
0.42
b.
0.65
c.
1.94
d.
2.37
NARRBEGIN: Kooshy
Kooshy Company
Income Statement
December 31, 2005
($ 000,000)
Sales
800.0
Cost of Goods Sold
576.0
Depreciation
55.0
Operating Expenses
88.0
Other Expenses
4.8
EBIT
76.2
Interest Expense
6.9
EBT
69.3
Taxes (40%)
27.7
Net Income
41.6
Dividends
4.16
Balance Sheet
December 31, 2005
($ 000,000)
Cash
10.0
Accounts Payable
63.0
37. If Kooshy Company forecasts a 20% sales increase, what will its pro forma cost of goods sold be,
assuming it remains at the same percent of sales?
a.
$576
b.
$635
c.
$691
d.
$720
38. Suppose Kooshy wishes to maintain a minimum $10 million cash balance, accounts receivable are
forecast to be 15% of sales, and inventory is expected to be 12% of forecast sales. Also, the firm plans
to add $35 million to fixed assets (depreciate the additional assets over seven years). What is the pro
forma level of total assets if sales are forecasted to increase 20%?
a.
$487
b.
$435
c.
$519
d.
$615
39. Refer to Kooshy. Suppose pro forma net income is $50 and pro forma total assets are $525. If accounts
payable maintain the same percent of sales, no new long term debt is issued, and the only addition to
owners’ equity is to retained earnings, what will be the pro forma balance in notes payable for a
forecasted 20% increase in sales? (That is, use notes payable as the balancing account.)
a.
$39
b.
$74
c.
$83
d.
$4
40. Kooshy Company wishes to maintain its dividend policy in the upcoming year. What will be the pro
forma addition to retained earnings if sales are forecasted to increase 20% and all costs are
proportional to sales?
a.
$5
b.
$37
c.
$50
d.
$45
41. Using ratios derived from the income statement and balance sheet above, what is Kooshy Company’s
sustainable growth rate?
a.
10.6%
b.
17.7%
c.
20.00%
d.
8.1%
42. Using ratios derived from the income statement and balance sheet above, what is Kooshy Company’s
“shorthand” estimate of external funds required (EFR) for a 20% increase in sales?
a.
-$4
b.
$0
c.
$29
d.
$160
NARRBEGIN: Silly Sally
Silly Sally, Inc.
Silly Sally, Inc. forecasts the following sales levels: January, $420; February, $435; March, $450; and
April, $470. Historically, 40% of its sales are for cash. Of the remaining sales, 80% are collected in
one month, 15% are collected in the second month, while the rest remain uncollected. November sales
were $380 and December sales were $500. (all values $000)
Purchases are made at 60% of the next month’s sales forecast, and are paid for in the month of
purchase. Other cash outlays are: rent, $10 monthly; wages and salaries, $50 monthly; a tax payment
of $30 in March; an interest payment of $15 in March; and a planned purchase of $20 of new fixed
assets in January.
NARREND
43. Refer to Silly Sally, Inc. What is the forecasted amount to be collected from cash sales in March?
a.
$450
b.
$360
c.
$261
d.
$180
44. Refer to Silly Sally, Inc. What are forecasted total cash collection for January?
a.
$420
b.
$442
c.
$168
d.
$240
45. Suppose Silly Sally, Inc. forecasts an ending cash balance of $20, its minimum desired balance, in
January. If February’s forecasted cash expenditures are $400, which of the following describes the
changes to Silly Sally’s cash balance and level of borrowing, if any, related to its minimum cash
balance, at the end of February?
a.
net cash flows of $21; borrowing will increase $21
b.
net cash flows of $21; borrowing will decrease $21
c.
net cash flows of $11; borrowing will increase $9
d.
net cash flows of $11; borrowing will decrease $9
46. What are Silly Sally’s forecasted cash outflows for February?
a.
$270
b.
$330
c.
$395
d.
$450
47. What is Silly Sally’s change in cash for March?
a.
$40 increase in cash
b.
$40 decrease in cash
c.
$85 increase in cash
d.
$20 increase in cash
48. Suppose Silly Sally experiences a change in customer payment patterns in accounts receivable, so that
payments are now 30% in cash, and of the credit sales, 60% are collected in one month, 35% are
collected in the second month, with the rest uncollected. What is the new forecasted collection for
January, and how much is this different from the original forecast?
a.
$408; $72 higher
b.
$336; $93 lower
c.
$442; $13 higher
d.
$429; $13 lower
49. Consider the following information for Smart Products: total assets=$1000; sales=$1540; net profit
margin=12%; dividend payout ratio=40%; accounts payable=$308. If sales are forecast to increase
30%, what is the “short cut” estimate of external funds required (EFR)?
a.
$64
b.
$208
c.
$300
d.
$462
50. Consider the following information for Smart Products: total assets=$1000; sales=$1540; net profit
margin=12%; dividend payout ratio=40%; equity=$555. What is Smart Products’ sustainable growth
rate?
a.
7%
b.
13%
c.
25%
d.
52%
51. Financial planning encompasses all but the following:
a.
setting long-run strategic goals
b.
investing the firms long-term cash
c.
preparing quarterly and annual budgets
d.
all of the above
52. Which of the following make(s) the planning process more complex than simply accepting all projects
that look promising?
a.
limits on capital
b.
limits on production capacity
c.
limits on human resources
d.
all of the above
53. With regard to planning, the first priority for a firm that competes by achieving lowest cost production
might be
a.
to determine whether it should make additional investments in order to achieve even
greater production efficiencies.
b.
to assess whether new or expanded marketing programs might increase the value of the
brand relative to those of competitors.
c.
to intensify its efforts to further discriminate its brand from that of its competitors.
d.
all of the above.
54. The multiyear action plan for the major investments and competitive initiative that the firm’s managers
believe will drive the future success of the enterprise is called
a.
the firm’s rollout plan.
b.
the tactical plan.