Deck 29: Financial Planning

Question 1

The first step in the preparation of cash budget is:

A) preparing the sources and uses of funds statement
B) sales forecast
C) estimating cash inflows
D) estimating cash outflows

Answer 1

sales forecast

Question 2

The cash cycle is represented by the following sequence:

A) Cash, raw materials, finished goods, and receivables, cash
B) Cash, receivables, finished goods, and raw materials, cash
C) Cash, raw material, receivables, finished goods, cash
D) None of the above

Answer 2

Cash, raw materials, finished goods, and receivables, cash

Question 3

Given the following assets;
I. Long-term assets
II. Inventories
III. Receivables
IV. Marketable securities
Arrange the above assets in the order of liquidity. (The most liquid being first)

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

Answer 3

IV, III, II and I

Question 4

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) none of the above

Question 5

A company has forecast sales in the first 3 months of the year as follows (figures in millions): January, $60; February, $80; March, $100. 60% of sales are usually paid for in the month that they take place and 40% 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 6

According to Strategy C, a firm would:

A) Be in permanent need of short-term borrowing
B) Have high current cash holdings
C) Use low or no short-term debt and more long-term financing
D) None of the above

Question 7

Cash inflow in cash budgeting comes mainly from:

A) Collection on accounts receivable
B) Short-term debt
C) Issue of securities
D) None of the above

Question 8

According to Strategy B, a firm would:

A) Maintain a high ratio of current assets to sales.
B) Use low or no short-term debt and more long-term financing.
C) Use more short-term debt and less long-term financing.
D) Be a short-term lender during a part of the year and a borrower during the rest.

Question 9

Given the following assets;
I. Long-term assets
II. Inventories
III. Receivables
IV. Marketable securities
Which is the least liquid of these assets?

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

Question 10

The cash budget is the primary short-term financial planning tool. The key reasons a cash budget is created are:
I. To estimate your investment in assets
II. To estimate the size and timing of your 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 11

Cumulative capital requirement can be met by:
I. long-term financing
II. short-term financing

A) I only
B) II only
C) I and II
D) None of the above

Question 12

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

A) The risk of long-term cash flows being more important than short-term risks
B) The present value of long-term cash flows being greater than short-term cash flows
C) The timing of short-term cash flow being within a year or less
D) All of the above

Question 13

A company has forecast sales in the first 3 months of the year as follows (figures in millions): January, $90; February, $20; March, $30. 70% of sales are usually paid for in the month that they take place and 30% 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 14

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 all assets and liabilities

Question 15

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

A) $446
B) $852
C) $410
D) None of the above

Question 16

A company has forecast sales in the first 3 months of the year as follows (figures in millions): January, $200; February, $140; March, $100. 50% of sales are usually paid for in the month that they take place, 30% in the following month, and the final 20% in the next month. 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

Question 17

Short-term financial decisions:
I. involve short lived assets
II. involve short lived liabilities
III. are easily reversed

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

Question 18

A company has forecast sales in the first 3 months of the year as follows (figures in millions): January, $80; February, $60; March, $40. 70% of sales are usually paid for in the month that they take place, 20% in the following month, and the final 10% in the next month. 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

Question 19

Cash budget may be prepared on a

A) monthly basis
B) weekly basis
C) daily basis
D) all of the above

Question 20

According to Strategy A, a firm should:

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) Use more short-term debt and less long-term financing
D) Have surplus cash that can be invested in short-term securities

Question 21

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 22

Strategy B implies that the firm is a short-term lender during a part of the year and a borrower during the rest.

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%
B) 57.1%
C) 20.0%
D) 71.4%

Question 24

Given the following data: plow back ratio = 50%; return on equity = 20%; equity to net assets ratio = 60%. Calculate the internal growth rate for the firm:

A) 6%
B) 10%
C) 12%
D) none of the above

Question 25

Short-term financial plans are developed using the following methods:
I. Trial and error
II. Simulation programs
III. Optimization models

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

Question 26

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

A) to develop 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 the above

Question 27

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%
B) 30.0%
C) 10.0%
D) 12.5%

Question 28

When firms prepare a financial plan they use the following:
I. develop several financial plans using most likely outcomes and also unexpected outcomes.
II. sensitivity analysis.
III. scenario analysis.

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

Question 29

Strategy A implies a permanent need for short-term borrowing.

Question 30

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 the above

Question 31

Internal growth rate is calculated as:

A) Internal growth rate = plowback ratio × profit margin
B) Internal growth rate = plowback ratio × return on equity
C) Internal growth rate = plowback ratio × return on equity × [equity/net assets]
D) None of the above

Question 32

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

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 33

Last year Foley Inc. reported total assets of $500, equity of $200, 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%
B) 30.0%
C) 10.0%
D) 12.5%

Question 34

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

Question 35

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%
B) 57.1%
C) 20.0%
D) 71.4%

Question 36

A large part of cash outflow in cash budgeting is due to:

A) Capital expenditures
B) Labor costs and other expenditures
C) Payments on accounts payable
D) Taxes, interest payments and dividend payments

Question 37

The firm's internal growth rate is defined as:

A) retained earnings/net income
B) retained earnings/net assets
C) retained earnings/total assets
D) none of the above

Question 38

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

A) Percentage of sales model
B) Regression model
C) Computer simulation model
D) None of the above

Question 39

The sustainable growth rate is equal to:

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 40

Strategy C implies a short-term cash surplus.

Question 41

How do you calculate the external capital required?

Question 42

Syndicated loans are subsequently resold to other institutions.

Question 43

What is the model that is used to prepare a pro-forma statement?

Question 44

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

Question 45

Briefly describe the cash cycle.

Question 46

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

Question 47

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

Question 48

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

Question 49

The percentage of sales method is the simplest of the financial planning models.

Question 50

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

Question 51

How do firms finance investments in current assets?

Question 52

Most firms make a permanent investment in net working capital.

Question 53

Discuss the process of preparing a financial plan?

Question 54

Define net working capital.

Question 55

Sales forecasts are the starting point for financial planning.

Question 56

Depreciation is not included in sources of cash because it is an expense.

Question 57

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

Question 58

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

Question 59

Financial planning models are generated using spreadsheet programs.