Question 1

The implications of the forecasts from a financial plan are determined by the:

Accepted Answer

The answer of The implications of the forecasts from a...

Question 2

A firm has $4 million in total assets and $2.2 million in equity. How much of its $500,000 capital budget should be debt-financed to retain the same debt-equity ratio?

Accepted Answer

New debt = $500,000 × ($4m - 2.2)/$4m = $225,000

Question 3

Financial planning models routinely adjust for present value and risk.

Accepted Answer

The answer of Financial planning models routinely adjust for present...

Question 4

Which one of the following is not a reason for compiling financial plans?

Accepted Answer

The answer of Which one of the following is not...

Question 5

A financial planning model will generally include all of the following except the:

Accepted Answer

The answer of A financial planning model will generally include...

Question 6

If factories are operating below full capacity, sales can increase without investment in fixed assets. However, beyond some sales level, new capacity must be added and additional investment in fixed assets must be made.

Accepted Answer

When factories operate below their full capacity, they have the potential to increase sales without requiring investment in fixed assets. However, there comes a point where additional sales cannot be accommodated without adding new capacity and investing in fixed assets.

Question 7

Calculate the rate at which a firm can grow without changing its leverage if its payout ratio is 70%, equity outstanding at the beginning of the year is $940,000, and its net income for the year is $162,000.

Accepted Answer

Sustainable growth rate = (1 - 0.70) × ($162,000/$940,000) = 0.0517, or 5.17%

Question 8

If sales growth for XYZ Corporation exceeds 6%, XYZ will need to seek external financing. This means that 6% is the:

Accepted Answer

The internal growth rate is the maximum rate a company can grow its sales without needing to obtain financing from external sources. In this scenario, if XYZ Corporation's sales growth exceeds 6%, it indicates that 6% is the highest rate at which it can grow without external financing, thus making it the internal growth rate.

Question 9

A planner's percentage of sales model forecasts that sales will grow by 20% next year. If costs of goods sold are proportionate at 70% of sales, then costs of goods sold will:

Accepted Answer

If sales grow by 20%, then costs of goods sold, which are proportionate at 70% of sales, will also increase by 20%, resulting in an increase of 20% in dollar terms. Therefore, the correct answer is D, increase by 20% in dollar terms.

Question 10

Financial models ensure consistency between growth assumptions and financing plans, and they identify the best financing plan.

Accepted Answer

The answer of Financial models ensure consistency between growth assumptions...

Question 11

When a firm is said to have no spare capacity, it:

Accepted Answer

When a firm has no spare capacity, it means it is operating at full capacity and cannot increase output without increasing its fixed assets. This is necessary to grow sales further, as the firm has reached the limit of what it can produce with its current assets.

Question 12

If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of 0.75 then:

Accepted Answer

Increase in debt = $400,000 × 0.75/(0.75 + 1) = $171,429

Question 13

If a firm's dividend payout ratio is determined after achieving a specific capital structure, then:

Accepted Answer

If the dividend payout ratio is determined after achieving a specific capital structure, then dividends are being used as a plug item to determine the appropriate payout ratio. This means that the dividend payout ratio is calculated based on the remaining funds available after all other capital needs have been met, and is not necessarily a function of the company's earnings or dividend forecasts. The other options presented do not accurately reflect this scenario.

Question 14

The decision to acquire fixed assets is unrelated to the current level of excess capacity.

Accepted Answer

The decision to acquire fixed assets is often related to the current level of excess capacity, as companies may decide to invest in new assets to expand their production capabilities when they are operating at or near full capacity.

Question 15

Planners often recommend entering a market for "strategic" reasons because the:

Accepted Answer

The recommendation to enter a market for strategic reasons typically means that the company has valuable follow-on investments in the new market. This could include synergies with existing business units, access to new technology or distribution channels, or opportunities for economies of scale. It is not necessarily related to competition in the original market, immediate net present value, or personal interests of the manager.

Question 16

When most of the elements of a financial plan are related to sales levels, the plan is:

Accepted Answer

A percentage of sales model is a financial plan where most of the elements are related to sales levels. This is a common approach to financial planning and involves calculating expenses, profits, and other financial metrics as a percentage of sales. This allows for easy adjustments as sales levels change, making it a flexible and effective approach to financial planning.

Question 17

Pro formas refer to:

Accepted Answer

Pro formas are projected financial statements that project future performance based on assumptions and analyzes past performance. These projections are useful for companies who are considering investments or expansion, and want to ensure they have an accurate understanding of potential future financial outcomes.

Question 18

The firm's current financial statements would be included in:

Accepted Answer

The firm's current financial statements are used as inputs in a financial plan to assess the current financial condition and to forecast future financial performance.

Question 19

Which one of the following is not typically included among the three major components of a financial planning model?

Accepted Answer

Intuitions, such as common sense and guesses, are not typically included as a component in a financial planning model. The three major components are inputs, planning model, and outputs.

Question 20

Outputs from a financial plan would include such items as:

Accepted Answer

Outputs from a financial plan typically include a pro forma statement of sources and uses of cash, which outlines the expected inflows and outflows of cash for a given period of time based on the assumptions and projections made in the financial plan. While sales growth forecasts and percentage of sales planning models are important inputs and considerations in developing a financial plan, they are not outputs of the plan itself. The firm's current financial statements may be used as inputs to the financial plan, but they are not outputs of the plan.

Quiz 18: Long-Term Financial Planning