Question 1

Breakeven analysis can involve determining the magnitude of the firm's profit or losses at output levels on and around the point where revenues equal costs.

Accepted Answer

Breakeven analysis involves determining the output level at which a firm's revenues equal its costs. It also involves analyzing profits and losses at output levels above and below the breakeven point.

Question 2

A firm whose degree of operating leverage (DOL) is equal to three means that a given percentage change in sales will change earnings per share by three times as much.

Accepted Answer

The answer of A firm whose degree of operating leverage...

Question 3

In general, excess capacity means more external financing is required to support increases in operations than would be needed if the firm previously operated at full capacity.

Accepted Answer

The answer of In general, excess capacity means more external...

Question 4

If any firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100 percent, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, the firm will require external financing.

Accepted Answer

If the dividend payout ratio is 100 percent, the firm has no retained earnings to finance its expansion and will require external financing.

Question 5

A firm that only utilises 40% of its fixed assets capacity to generate R1,000,000 in sales will be able to increase sales to R4,000,000 before full capacity is reached and plant and equipment would have to be increased.

Accepted Answer

The answer of A firm that only utilises 40% of...

Question 6

Other things held constant, a high degree of total leverage will mean that a relatively small change in sales will result in a large change in EPS.

Accepted Answer

This statement is true. When a company has a high degree of total leverage, it means that it has a high amount of fixed costs (such as interest payments on debt) relative to its variable costs. As a result, even a small change in sales can have a significant impact on the company's earnings before interest and taxes (EBIT). This change in EBIT is then magnified by the effect of the company's fixed interest payments on its net income, leading to a large change in EPS.

Question 7

The operating breakeven volume in units can be found by dividing the firm's total fixed cost in rands by its profit margin per unit (i.e., price less variable cost).

Accepted Answer

The formula to calculate the operating breakeven volume in units is to divide the total fixed cost by the profit margin per unit, which is the price less variable cost. Therefore, the statement is true.

Question 8

Lumpy assets are assets that cannot be acquired in small increments; they must be obtained in large discrete amounts.

Accepted Answer

Lumpy assets, such as real estate or heavy machinery, require significant resources in order to acquire and cannot be easily purchased in small increments.

Question 9

The projected statement of financial position method assumes that the key ratios are constant, which means, for example, that if you plotted a graph of inventories versus sales, the regression line would be linear and would have a positive Y-intercept.

Accepted Answer

The statement is inaccurate as the projected statement of financial position method does not make any assumptions regarding the key ratios being constant, and the graph of inventories versus sales may not necessarily have a linear regression line or a positive Y-intercept.

Question 10

Other things held constant, a high degree of operating leverage will mean that a relatively small change in sales will result in a large change in operating income.

Accepted Answer

This is because a high degree of operating leverage means that fixed costs make up a large portion of total costs, so a small increase in sales will result in a larger increase in contribution margin, leading to a proportionally larger increase in operating income. However, this effect works in reverse as well, so a decrease in sales will lead to a larger decrease in operating income.

Question 11

Financial planning involves implementing the financial plans, or forecasts, and dealing with the feedback and adjustment process that is necessary to ensure the goals of the firm are pursued appropriately.

Accepted Answer

The answer of Financial planning involves implementing the financial plans,...

Question 12

The degree of total leverage shows how a change in sales will affect operating income.

Accepted Answer

The answer of The degree of total leverage shows how...

Question 13

One potential benefit of high operating leverage is that it can reduce the average cost per unit at high levels of output, thus generating a competitive cost advantage.

Accepted Answer

High operating leverage means that a higher proportion of fixed costs are being used to produce goods or services. As output increases, these fixed costs are spread over a larger number of units, resulting in lower average cost per unit. This can give a competitive cost advantage to the company.

Question 14

The fact that long-term debt and equity funds are raised infrequently and in large amounts lessens the need for the firm to forecast them on a continual basis.

Accepted Answer

The answer of The fact that long-term debt and equity...

Question 15

The projected statement of financial position forecasting method would be appropriate if, in a regression of sales on each asset and spontaneous liability, the regression line was linear and passed through the origin.

Accepted Answer

The projected statement of financial position forecasting method assumes linearity and proportionality between assets, liabilities, and sales. If the regression line is linear and passes through the origin, it indicates a direct relationship between the changes in assets and liabilities with sales, making the projected statement of financial position forecasting method appropriate.

Question 16

Financial planning involves the projection of sales, income, and assets as well as the determination of the resources needed to achieve these projections.

Accepted Answer

Financial planning does involve projecting sales, income, and assets, as well as determining the necessary resources to achieve these projections.

Question 17

Breakeven analysis is important in the planning and control process because the cost-volume-profit relationship can be influenced greatly by the proportion of the firm's assets that are fixed.

Accepted Answer

The answer of Breakeven analysis is important in the planning...

Question 18

Financial control involves the projection of sales, income, and assets as well as the determination of the resources needed to achieve these projections.

Accepted Answer

The answer of Financial control involves the projection of sales,...

Question 19

The firm's cost-volume-profit relationship is most influenced by variable cost and, thus, the level of fixed or operating costs plays a relatively minor role.

Accepted Answer

The firm's cost-volume-profit relationship is influenced by both variable and fixed costs. Fixed costs determine the break-even point, while variable costs affect the contribution margin and ultimately the level of profitability. Therefore, the level of fixed or operating costs plays a significant role in the cost-volume-profit relationship.

Question 20

Two firms that have the same financial leverage must also have the same ROE, because both financial leverage and ROE measure the risk associated with equity financing.

Accepted Answer

Financial leverage measures the amount of debt financing a firm uses relative to equity financing, while ROE measures the profitability of a company's equity financing. While financial leverage can affect ROE, the two measures are not necessarily the same and can vary depending on other factors such as interest rates and company performance.

Quiz 17: Financial Planning and Control