Deck 9: Projecting Financial Statements

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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 .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%

Question 24

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%
B)18.75%
C)6.25%
D)4.69%
E)none of the above

Question 25

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 26

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

A)early-maturity
B)rapid-growth
C)survival
D)start-up
E)development

Question 27

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

Question 28

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

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
E)seed financing

Question 30

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
E)pre-tax income

Question 31

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

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

Question 32

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 theprobabilities 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.

Question 33

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 34

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

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

Question 35

Which of the following is not part of the financial forecasting process used 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

Question 36

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

Question 37

Which of the following statements is incorrect?

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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)12.5%
C)15.0%
D)17.5%
E)20.0%

Question 42

Determine a firm's "financial policy" multiplier based on the following information:sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2 times.

A)1.00
B)1.25
C)1.50
D)1.75
E)2.00

Question 43

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%
E)75%

Question 44

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

Question 45

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
E)$1,400,000

Question 46

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 the retention rate = 50%.

A)10%
B)15%
C)20%
D)25%
E)30%

Question 47

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 the dividend payout percentage = 20%.

A)10%
B)16%
C)20%
D)24%
E)30%

Question 48

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

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

Question 49

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

A)10%
B)20%
C)30%
D)40%
E)50%

Question 50

If a venture has a return on assets (ROA)= 10%,an equity multiplier 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%

Question 51

The financial funds still needed to finance asset growth after using 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

Question 52

Use the following information to estimate a venture's sustainable growth 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%

Question 53

A firm has net income of $320,000 on 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%
B)15%
C)6.25%
D)4.69%
E)none of the above

Question 54

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)5%
B)10%
C)15%
D)20%
E)25%

Question 55

If a venture has a return on assets (ROA)= 10%,an equity multiplier 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%

Question 56

Which one 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 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)5%
B)10%
C)15%
D)20%
E)25%

Question 58

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 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 is a forecasting method used to project financial statements?

A)percent-of-sales method
B)percent-of-expenses method
C)GNP-ratio method
D)a and b
E)a,b,and c

Question 61

When projecting financial statements,one would first ,and then 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