Deck 9: Projecting Financial Statements

Question 1

A firm's maximum sustainable sales growth rate occurs at a retention ratio of 100%.

Answer 1

True

Question 2

Financial capital needed (FCN)is the amount of funds needed to acquire assets necessary to support a firm's sales growth.

Answer 2

True

Question 3

Sales forecasting accuracy is usually lowest during a venture's development stage in its life cycle.

Answer 3

True

Question 4

The cost of obtaining additional funds, such as additional interest expenses from borrowing funds, may be explicit and impact AFN.

Question 5

In a typical venture's life cycle, the rapid-growth stage involves creating and building value, obtaining additional financing, and examining exit opportunities.

Question 6

Long-term financial planning begins with a forecast of annual working capital needs.

Question 7

Internally generated funds is the cash produced from operating a firm over a specified time period.

Question 8

The sustainable sales growth rate is equal to ROA times the retention ratio.

Question 9

Public or seasoned financing typically occurs during the survival stage of a venture's life cycle.

Question 10

Additional funds needed (AFN)is the gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings.

Question 11

The volatility of a firm's cash balance will steadily decrease as the firm progresses from the survival stage to the rapid-growth stage.

Question 12

The added costs associated with obtaining equity capital are based on investor expected rates of return and are explicit costs which affect AFN.

Question 13

Sales forecasting accuracy is usually highest during a venture's startup stage in its life cycle.

Question 14

Forecasting for firms with operating histories is generally much easier than forecasting for early-stage ventures.

Question 15

The rate at which a firm can grow sales based on the retention of business profits is known as the sustainable sales growth rate.

Question 16

First-round financing usually occurs during a venture's rapid-growth life cycle stage.

Question 17

When using the beginning-of-period equity base, the sustainable sales growth rate is equal to ROE times the retention ratio.

Question 18

A customer-driven or "bottom-up" approach to forecasting sales is used primarily to forecast industry sales growth rates.

Question 19

Sales forecasts usually are based on either a single specific scenario or weighted averages of several possible realizations.

Question 20

The weighted average of a set of possible outcomes or scenarios is known as the expected value.

Question 21

Lola is in the process of forecasting the sales growth rate for an early-stage venture specializing in the production of durable running shoes. Lola predicts a 0.20 probability of an 80% growth in sales, a 0.30 probability of a 60% growth in sales, a 0.40 probability of a 40% growth in sales, and a 0.10 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%

Question 22

The constant-ratio forecasting method is a variant of the percent-of-sales forecasting method.

Question 23

An expected value is:

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

Question 24

Which of the following is not considered to be a major emphasis during the rapid-growth stage in a successful venture's life cycle?

A)choose organizational form
B)create and build value
C)obtain additional financing
D)examine exit opportunities

Question 25

Increases in accounts payable and notes payable are examples of spontaneously generated funds.

Question 26

Public or seasoned financing is generally associated with which of the following life cycle stages?

A)startup stage
B)survival stage
C)early-maturity stage
D)development stage

Question 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.

Question 28

During which life cycle stage is a venture typically most accurate in forecasting sales?

A)survival stage
B)startup stage
C)development stage
D)early-maturity stage

Question 29

During which round of financing is a venture typically most accurate in forecasting sales?

A)seasoned financing
B)mezzanine financing
C)first-round financing
D)startup financing

Question 30

An increase in accounts receivable will require additional financing unless the increase is offset by an equal decrease in another asset account.

Question 31

A new venture usually begins its sales forecast by first:

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

Question 32

Which of the following life cycle stages would generally be associated with the second lowest sales forecasting accuracy?

A)early-maturity stage
B)rapid-growth stage
C)survival stage
D)startup stage

Question 33

The percent of sales forecasting method must project all cost and balance sheet items at the same growth rate as sales.

Question 34

Increases in accounts receivable and accounts payable that accompany sales increases are called spontaneously generated funds.

Question 35

A firm with a positive growth rate in sales will require some additional funds, assuming the existing ratios will not be changed.

Question 36

Which of the following is not a step in forecasting sales for a seasoned 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 with 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)consider the effects of changes in the firm's debt/equity blend on the sales forecasts

Question 37

Spontaneously generated funds are increases in accounts receivable and accounts payable that accompany sales increases.

Question 38

A complete balance sheet and income statement mechanically imply a working statement of cash flows.

Question 39

Preparing a projected statement of cash flows serves as check on the projected income statement and projected balance sheet.

Question 40

Which of the following statements is not true?

A)forecasting sales is the first step in creating projected financial statements
B)forecasting sales tends to be more accurate for mature ventures than for early-stage ventures
C)forecasting sales is relatively unimportant for early-stage ventures that have little historical financial data
D)forecasting sales should consider the likely impact of major operating changes

Question 41

Internally generated funds which are available for distribution to owners of 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

Question 42

Use the following information to estimate a venture's sustainable growth rate: net income = $200,000; total assets = $1,000,000; equity multiplier based on beginning common equity = 2.0 times; and retention rate = 25%.

A)5%
B)25%
C)20%
D)10%

Question 43

A venture's common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate?

A)15%
B)30%
C)20%
D)25%

Question 44

If a venture has a return on assets (ROA)of 10%, an equity multiplier based on beginning equity of 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be:

A)10%
B)16%
C)20%
D)24%

Question 45

Which of the following ratios is not part of the standard return on equity (ROE)model?

A)net profit margin
B)asset turnover
C)equity multiplier
D)retention rate

Question 46

A firm projects net income to be $500,000, intends to pay out $125,000 in dividends, and had $2 million of equity at the beginning of the year. The firm's sustainable growth rate is:

A)5.50%
B)18.75%
C)6.25%
D)4.69%

Question 47

If a venture has a return on assets (ROA)of 10%, an equity multiplier based on beginning equity of 3.5 times, and a retention rate of 50%, the sustainable growth rate would be:

A)10.0%
B)17.5%
C)20.0%
D)35.0%

Question 48

Determine a firm's financial policy multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2.0 times.

A)1.00
B)1.25
C)1.50
D)2.00

Question 49

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and dividend payout percentage = 20%.

A)16%
B)20%
C)24%
D)30%

Question 50

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and retention rate = 50%.

A)10%
B)15%
C)20%
D)25%

Question 51

The financial funds needed to acquire assets necessary to support a firm's sales growth is called:

A)spontaneously generated funds
B)additional funds needed
C)addition in retained earnings
D)financial capital needed

Question 52

If a venture has a return on assets (ROA)of 12%, an equity multiplier based on beginning equity of 3.0 times, and a sustainable growth rate of 18%, the retention rate would be:

A)60%
B)30%
C)50%
D)40%

Question 53

If beginning-of-period common equity is $200,000 and end-of-period common equity is $300,000, the sustainable growth rate is:

A)33%
B)40%
C)50%
D)67%

Question 54

A firm has net income of $320,000 and sales of $3,200,000. Its assets total $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)5.50%
B)15.00%
C)6.25%
D)4.75%

Question 55

Determine a firm's return on assets percentage based on the following 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)22.5%
C)20.0%
D)17.5%

Question 56

Which of the following is not part of the financial forecasting process used to project financial statements?

A)project the cost of equity capital
B)project the income statement
C)project the balance sheet
D)project the statement of cash flows

Question 57

A venture's common equity was $50,000 at the end of last year. If the venture's common equity at the end of this year was $60,000, what was its sustainable sales growth rate?

A)25%
B)10%
C)15%
D)20%

Question 58

A sales growth rate based on the retention of profits is referred to as the:

A)sustainable sales growth rate
B)spontaneous sales growth rate
C)nominal sales growth rate
D)weighted average sales growth rate

Question 59

The increase in accounts payables and accruals that occur with a sales increase is called:

A)spontaneously generated funds
B)additional funds needed
C)addition in retained earnings
D)financial capital needed

Question 60

Which of the following would increase a firm's need for additional funds?

A)an increase in the profit margin
B)a decrease in the expected sales growth rate
C)a decrease in assets
D)an increase in the dividend payout rate

Question 61

When projecting financial statements, one would first __________ , and then proceed to __________.

A)project 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

Question 62

When long-term financial planning efforts set cash as a percentage of sales 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

Question 63

Which of the following is a forecasting method used to project financial statements?

A)percent-of-sales method
B)percent-of-expenses method
C)return on equity method
D)additional funds needed method

Question 64

Your firm recorded sales for the most recent year of $10 million generated 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 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