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, $90; February, $20; March, $30.Seventy 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

Answer 1

$27 million

Question 2

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 2

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

Question 3

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.

Answer 3

have a permanent need for short-term borrowing.

Question 4

Arrange the following assets in decreasing order of liquidity (i.e., the most liquid should be listed first).

A)Equipment and machinery, inventories, accounts receivable, and marketable securities
B)Inventories, accounts receivable, marketable securities, and equipment and machinery
C)Accounts receivable, marketable securities, inventories, and equipment and machinery
D)Marketable securities, accounts receivable, inventories, and equipment and machinery

Question 5

A company has forecast sales in the first three months of the year as follows (figures in millions): January, $60; February, $80; March, $100.Sixty 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 6

A company has forecast sales in the first three months of the year as follows (figures in millions): January, $200; February, $140; March, $100.Fifty 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

Question 7

A company has forecast sales in the first three months of the year as follows (figures in millions): January, $80; February, $60; March, $40.Seventy 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

Question 8

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 9

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 10

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 11

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 12

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

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 13

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 14

The cash budget is the primary short-term financial planning tool.The key reason(s) that a treasurer creates a cash budget is (are)

A)to estimate the firm's investment in assets.
B)to estimate the size and timing of the firm's new cash flows and to prepare for potential financing needs.
C)to estimate the size and timing of the firm's new cash flows.
D)to prepare for potential financing needs.

Question 15

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 16

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 17

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 18

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 19

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 20

Which of the following assets is the least liquid?

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

Question 21

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 22

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 23

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 24

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 25

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 26

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 percent
C)10 percent
D)12.5 percent

Question 27

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 28

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

Question 29

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

Question 30

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 percent
B)57.1 percent
C)20 percent
D)71.4 percent

Question 31

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 32

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 33

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

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 percent
C)10 percent
D)12.5 percent

Question 35

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 36

Short-term financial plan models are offered by

A)banks.
B)banks and accounting firms.
C)banks, accounting firms, and management consultants.
D)banks, accounting firms, management consultants, and specialized computer software firms.

Question 37

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

A)Monte Carlo simulations.
B)Monte Carlo simulations and sensitivity analysis.
C)Monte Carlo simulations, sensitivity analysis, and scenario analysis.
D)sensitivity analysis and scenario analysis.

Question 38

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 percent
B)57.1 percent
C)20 percent
D)71.4 percent

Question 39

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)net income/net assets.

Question 40

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 41

Define net working capital.

Question 42

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

Question 43

How does one calculate external capital required?

Question 44

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

Question 45

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

Question 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

Most firms make a permanent investment in net working capital.

Question 52

Discuss the process of preparing a financial plan.

Question 53

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

Question 54

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 55

How do firms finance investments in current assets?

Question 56

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

Question 57

Sales forecasts are the typical starting point for financial planning.

Question 58

Briefly describe the cash cycle.

Question 59

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