Deck 29: Financial Planning

Question 1

A company has forecast sales in the first three months of the year as follows (figures in millions): January, $80; February, $60; March, $40. 70 percent of sales are usually paid for in the month that they take place, 20 percent in the following month, and the final 10 percent in the month after that. Receivables at the end of December were $23 million. What are the forecasted collections on accounts receivable in March?

A)$180 million
B)$13 million
C)$40 million
D)$48 million

Answer 1

$48 million

Question 2

A company has forecast sales in the first three months of the year as follows (figures in millions): January, $200; February, $140; March, $100. 50 percent of sales are usually paid for in the month that they take place, 30 percent in the following month, and the final 20 percent in the month after that. Receivables at the end of December were $100 million. What are the forecasted collections on accounts receivable in March?

A)$132 million
B)$100 million
C)$240 million
D)$92 million

Answer 2

$132 million

Question 3

Short-term financial decisions

A)involve short-lived assets.
B)involve short-lived liabilities.
C)are easily reversed.
D)involve short-lived assets, involve short-lived liabilities, and are easily reversed.

Answer 3

involve short-lived assets, involve short-lived liabilities, and are easily reversed.

Question 4

The main difference between short-term and long-term finance is

A)the risk of long-term cash flows is more important than short-term risks.
B)long-term cash flows have greater present values than short-term cash flows.
C)short-term cash flows occur within a year or less.
D)All of these answers are correct.

Question 5

A firm that chooses Strategy B, as portrayed in Chapter 29, should plan to

A)maintain a high ratio of current assets to sales.
B)use low or no short-term debt and more long-term financing.
C)repurchase a substantial number of shares.
D)be a short-term lender during a part of the year and a borrower during the rest.

Question 6

Arrange the following assets in decreasing order of liquidity, i.e., the most liquid should be listed first.
I.equipment and machinery;
II.inventories;
III.accounts receivable;
IV.marketable securities

A)I, II, III, and IV
B)II, III, IV, and I
C)III, IV, II, and I
D)IV, III, II, and I

Question 7

Which of the following assets is the least liquid?

A)Equipment and machinery
B)Finished goods inventory
C)Accounts receivable
D)Marketable securities

Question 8

The cash budget is the primary short-term financial planning tool. The key reason(s)that a treasurer creates a cash budget is (are)
I.to estimate the firm's investment in assets;
II.to estimate the size and timing of the firm's new cash flows;
III.to prepare for potential financing needs

A)I only
B)II and III only
C)II only
D)III only

Question 9

A company has forecast sales in the first three months of the year as follows (figures in millions): January, $90; February, $20; March, $30. 70 percent of sales are usually paid for in the month that they take place and 30 percent in the following month. Receivables at the end of December were $20 million. What are the forecasted collections on accounts receivable in March?

A)$27 million
B)$50 million
C)$23 million
D)$35 million

Question 10

The cash cycle occurs in the following sequence:

A)cash, raw materials, finished goods, receivables, and cash.
B)cash, receivables, finished goods, raw materials, and cash.
C)cash, raw materials, receivables, finished goods, and cash.
D)cash, finished goods, receivables, raw materials, and cash.

Question 11

The following is the general formula for calculating the "Ending accounts receivable (AR)":

A)Ending (AR)= beginning (AR)− sales + collections.
B)Ending (AR)= beginning (AR)+ sales − collections.
C)Ending (AR)= beginning (AR)+ sales + collections.
D)Ending (AR)= beginning (AR)− sales − collections.

Question 12

Cash inflow, in cash budgeting, comes mainly from

A)collections on accounts receivable.
B)short-term debt.
C)issue of securities.
D)sale of seasoned equity.

Question 13

A cash-flow statement categorizes cash flows into which three general categories?

A)Working capital, short-term cash flows, and long-term cash flows.
B)Operating activities, investing activities, and financing activities.
C)Cash accounts, bank accounts, and transfer accounts.
D)Inventory, accounts receivable, and accounts payable.

Question 14

Assume the following data: Total current assets = $852; Total current liabilities = $406; Long-term debt = $442. Calculate net working capital.

A)$446
B)$852
C)$410
D)$4

Question 15

A firm that chooses Strategy A, as portrayed in Chapter 29, should plan to

A)maintain a high ratio of current assets to sales.
B)use high levels of short-term debt and low levels of long-term financing.
C)decrease its dividend soon.
D)have surplus cash that can be invested in short-term securities.

Question 16

A firm that chooses Strategy C, as portrayed in Chapter 29, should plan to

A)have a permanent need for short-term borrowing.
B)have high current cash holdings.
C)use low or no short-term debt and more long-term financing.
D)increase its dividend soon.

Question 17

The first step in the preparation of a cash budget is

A)calculating appropriate financial ratios.
B)preparing a sales forecast.
C)determining the firm's dividend policy.
D)determining long-term capital structure.

Question 18

Net working capital is defined as

A)the current assets in a business.
B)the difference between current assets and current liabilities.
C)the present value of all short-term cash flows.
D)the difference between total assets and total liabilities.

Question 19

A firm can meet its cumulative capital requirement via

A)long-term financing.
B)short-term financing.
C)long-term financing and short-term financing.
D)None of these answers are correct.

Question 20

A company has forecast sales in the first three months of the year as follows (figures in millions): January, $60; February, $80; March, $100. 60 percent of sales are usually paid for in the month that they take place and 40 percent in the following month. Receivables at the end of December were $24 million. What are the forecasted collections on accounts receivable in March?

A)$88 million
B)$92 million
C)$100 million
D)$140 million

Question 21

A firm can achieve a higher growth rate (within limits)without raising external capital by

A)increasing the proportion of debt in its capital structure.
B)increasing its current ratio.
C)decreasing its inventory turnover.
D)increasing its plowback ratio.

Question 22

The sustainable growth rate equals

A)plowback ratio × return on equity.
B)return on equity/plowback ratio.
C)return on assets × plowback ratio.
D)plowback ratio × return on equity × (equity/net assets).

Question 23

Last year Axle Inc. reported total assets of $400, equity of $200, net income of $50, dividends of $10, and earnings retained in the period of $40. What is Axle Inc.'s sustainable growth rate?

A)25.0 percent
B)57.1 percent
C)20.0 percent
D)71.4 percent

Question 24

Strategy A, as portrayed in Chapter 29, implies a permanent need for short-term borrowing.

Question 25

Strategy C, as portrayed in Chapter 29, implies a short-term cash surplus.

Question 26

The basic relationship for determining external capital required is

A)External capital required = − operating cash flow + investment in net working capital.
B)External capital required = − operating cash flow + investment in net working capital + investment in fixed assets.
C)External capital required = − operating cash flow + investment in net working capital + investment in fixed assets + dividends.
D)None of these answers are correct.

Question 27

Short-term financial decisions are conceptually easier to make than long-term decisions.

Question 28

Among models used to develop a financial plan, the following is the simplest:

A)percentage of sales model.
B)regression model.
C)computer simulation model.
D)optimization model.

Question 29

Assume the following data: Plowback ratio = 50 percent; Return on equity = 20 percent; Equity to net assets ratio = 60 percent. Calculate the internal growth rate for the firm.

A)6 percent
B)10 percent
C)12 percent
D)17 percent

Question 30

When firms prepare a financial plan, they use the following:

A)Guessing simulations.
B)Guessing simulations and sensitivity analysis.
C)Guessing simulations, sensitivity analysis, and scenario analysis.
D)Sensitivity analysis and scenario analysis.

Question 31

The firm's internal growth rate is defined as

A)retained earnings/net income.
B)reinvested earnings/net assets.
C)retained earnings/total assets.
D)net income/net assets.

Question 32

The internal growth rate equals

A)plowback ratio × profit margin.
B)plowback ratio × return on equity.
C)plowback ratio × return on equity × [equity/net assets].
D)None of these answers are correct.

Question 33

The most important function of a short-term financial plan is

A)to develop a cash budget.
B)to cover the forecasted requirements in the most economical way possible.
C)to help develop the long-term financial plan.
D)None of these answers are correct.

Question 34

Last year Foley Inc. reported net fixed assets of $400, net working capital of $100, net income of $120, dividends of $70, and earnings retained in the period of $50. What is Foley Inc.'s internal growth rate?

A)17.5 percent
B)30.0 percent
C)10.0 percent
D)12.5 percent

Question 35

In cash budgeting, which of the following is a cash outflow?

A)Sales
B)Collections on accounts receivable
C)Payments on accounts payable
D)Issuance of equity

Question 36

Last year Axle Inc. reported net assets of $400, equity of $200, net income of $50, dividends of $10, and earnings retained in the period of $40. What is Axle Inc.'s internal growth rate?

A)10.0 percent
B)57.1 percent
C)20.0 percent
D)71.4 percent

Question 37

Short-term financial plans are developed using the following methods:

A)trial and error.
B)trial and error and simulation programs.
C)simulation programs and optimization models.
D)trial and error, simulation programs, and optimization models.

Question 38

Strategy B, as portrayed in Chapter 29, implies that the firm is a short-term lender during a part of the year and a short-term borrower during the rest of the year.

Question 39

Short-term financial plan models are offered by
I.banks;
II.accounting firms;
III.management consultants;
IV.specialized computer software firms

A)I only.
B)I and II only.
C)I, II, and III only
D)I, II, III, and IV.

Question 40

Last year Foley Inc. reported total assets of $500, equity of $400, net income of $100, dividends of $50, and earnings retained in the period of $50. What is Foley Inc.'s sustainable growth rate?

A)17.5 percent
B)30.0 percent
C)10.0 percent
D)12.5 percent

Question 41

Briefly discuss some of the problems associated with the use of the percentage of sales model.

Question 42

Briefly describe the cash cycle.

Question 43

The growth rate that a company can achieve using external funds is called the internal growth rate.

Question 44

Which model do firms typically use to prepare a pro-forma long-term financial plan?

Question 45

Small companies in relatively high-risk industries are more likely to hold large cash surpluses.

Question 46

Depreciation is not included as a source of cash because it is an expense.

Question 47

How do firms finance investments in current assets?

Question 48

A problem with the percentage of sales method is that some variables are relatively insensitive to sales. The percentage of sales method will therefore, in a growing company, overstate such values.

Question 49

A taxpaying firm with excess cash can at best generate zero NPV for shareholders by investing in marketable securities.

Question 50

The term short-term planning usually indicates planning for the next 12 months.

Question 51

Most firms make a permanent investment in net working capital.

Question 52

The main source of cash in a cash budget is collections on accounts receivable.

Question 53

Discuss the process of preparing a short-term financial plan.

Question 54

Discuss the process of preparing a financial plan.

Question 55

Two common sources of short-term financing are borrowing from a bank and stretching payables.

Question 56

Discuss the reasons why a company should prepare a cash budget.

Question 57

Sales forecasts are the typical starting point for financial planning.

Question 58

Define net working capital.

Question 59

How does one calculate external capital required?