Deck 19: Strategic Financial Planning and Forecasting

Question 1

Financial planning deals with establishing sales forecasts for a time horizon set by a firm's management.

Answer 1

False

Question 2

The financing plan documents the firm's long-term goals, the strategies that management will use to achieve the goals, and the capabilities the firm needs to sustain its competitive position.

Answer 2

False

Question 3

The outputs of the financial planning model are a series of pro forma financial statements and financial ratios based on these statements.

Answer 3

True

Question 4

The cash budget identifying the time line for cash inflows and outflows included in divisional business plans is part of the financial plan.

Question 5

The strategic plan identifies everything but mergers, alliances, and divestitures that may happen in the near future.

Question 6

Projected or pro forma statements can be used to analyze the investment alternatives but not to estimate the amounts of external funding needed.

Question 7

Since sales are often correlated to the regional or national economy, macroeconomic forecasts are incorporated into the model.

Question 8

Once capital investments are made, they are almost always impossible to reverse.

Question 9

The financial plan focuses on strategic planning and investment planning.

Question 10

The investment plan addresses the issue of what capital resources the management needs to get to achieve their goals.

Question 11

Financial planning models are not considered an integral part of financial planning.

Question 12

Financial models provide management with the ability to prepare projected financial statements.

Question 13

Pro forma financial statements that result from financial planning models are always perfectly balanced.

Question 14

In putting together a financial plan, management addresses three main issues through their strategic plan, investment plan, and financing plan.

Question 15

Investment and financing decisions are not considered inputs in financial planning models.

Question 16

The financing plan deals with how the firm is going to secure the funds needed to pay for the capital resources required.

Question 17

The strategic plan addresses the issue of what capital resources management needs to achieve their goals.

Question 18

Financial statements and sales forecasts are considered major inputs in developing financial planning models.

Question 19

Capital expenditures can be one-time investments or routine investments that allow the firm to continue its operations.

Question 20

In the financing plan, management states that the firm will seek to raise funds externally even if sufficient internally generated funds are available to fund projects.

Question 21

Fixed assets vary directly with sales when firms are operating at less than full capacity.

Question 22

Holding the growth rate constant, the higher the firm's payout ratio, the larger the amount of debt or equity financing needed.

Question 23

Financial planning helps management establish financial and operating goals for the firm and to communicate those goals throughout the firm.

Question 24

The sustainable growth rate is the rate of growth that the firm can sustain without selling additional equity.

Question 25

In the percent of sales method, all income statement and balance sheet accounts vary directly with sales.

Question 26

The higher a firm's plowback ratio, the higher the firm's sustainable growth rate.

Question 27

The strategic plan identifies

A) the lines of business in which a firm will compete.
B) major areas of investment in real assets.
C) capital expenditures, acquisitions. and new lines of business.
D) All of the above.

Question 28

The lower a firm's ROE, the lower the firm's sustainable growth rate.

Question 29

While sales are often correlated to the regional or national economy, it is not necessary to incorporate macroeconomic forecasts into the model.

Question 30

The sustainable growth rate is the rate of growth that the firm can sustain without selling additional debt.

Question 31

The higher a firm's dividend payout ratio, the higher the firm's internal growth rate.

Question 32

Fixed assets vary directly with sales when firms are operating at full capacity.

Question 33

The financial plan addresses the following issue(s):

A) Where is the company headed?
B) What capital resources does the management need to get there?
C) How is the firm going to pay for the resources needed?
D) All of the above.

Question 34

Which of the following components make up a financial plan

A) the strategic plan.
B) the investment plan.
C) the financing plan.
D) All of the above.

Question 35

The capital intensity ratio measures the dollar amount of sales per dollar invested in assets.

Question 36

According to the text, the financial plan covers a period of

A) one year.
B) three to five years.
C) ten years.
D) None of the above.

Question 37

The percent of sales method is a complex financial planning model.

Question 38

When a firm maintains a constant dividend policy, the firm's growth rate has no bearing on the external financing needed.

Question 39

Firms that are not highly capital intensive are more risky than those that are.

Question 40

All but one of the following issues are addressed in the financial plan.

A) What is the growth rate for a firm's main competitor?
B) Where is the company headed?
C) What capital resources does the management need to get there?
D) How is the firm going to pay for the resources needed?

Question 41

Which one of the following statements is NOT true about financial planning models?

A) Financial statements serve as the first major input and become the baseline to compare the projected financial statements.
B) Macroeconomic forecasts and their impact on the firm's sales are also included.
C) Investment and financing decisions are not considered as inputs.
D) Changes in the firm's balance sheet and income statement items as a result of the growth in sales are also used in these models.

Question 42

The sales forecasts used in financial planning

A) are developed using a variety of techniques.
B) are generated within the firm.
C) utilize macroeconomic variables as input.
D) All of the above are true.

Question 43

In using more sophisticated planning models, which one of the following statements is NOT true?

A) Current liabilities are likely to vary directly with sales.
B) Long-term liabilities and equity accounts change as a direct result of managerial decisions.
C) Retained earnings will vary as sales changes but not directly as it is affected by the firm's dividend payout policy.
D) All of the above are true

Question 44

One statement that is NOT true about more sophisticated financial planning model is that:

A) only fixed costs change directly with sales.
B) working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales.
C) fixed assets do not always vary directly with sales.
D) All of the above are true

Question 45

Which one of the following statements is NOT true?

A) The ratio of total assets to sales is called the capital intensity ratio.
B) The ratio of sales to total assets is called the capital intensity ratio.
C) The higher the ratio, the more capital a firm needs to generate sales.
D) Firms that are highly capital intensive are more risky than those that are not.

Question 46

The financial plan focuses on

A) the inventory accounting method decision and the accounts payables decision.
B) the current assets decision and the current liabilities decision.
C) the investment decision and the financing decision.
D) none of the above.

Question 47

The strategic plan does NOT identify

A) major areas of investment in real assets.
B) future mergers, alliances, and divestitures.
C) working capital strategies.
D) the lines of business a firm will compete in.

Question 48

Which statement is NOT true for a firm that is operating at full capacity?

A) Fixed assets vary directly with sales.
B) Fixed assets can never vary directly with sales.
C) Fixed assets can be incrementally changed.
D) All of the above are true

Question 49

The financing plan of a firm will indicate

A) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm's dividend policy.
B) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm's working capital policy.
C) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the firm's dividend policy, and the firm's working capital policy.
D) the firm's dividend policy, the desired capital structure for the firm, and the firm's working capital policy.

Question 50

The inputs used in building financial planning models include

A) financial statements, sales forecasts, and the firm's investment decisions.
B) pro forma statements, sales forecasts, and macroeconomic variables.
C) pro forma statements, sales forecasts, and financing decisions.
D) none of the above.

Question 51

Which one of the following is NOT true about the capital budgeting process?

A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders.
B) Senior management reviews the list.
C) Once the list is made, no management review can change it.
D) All of the above are true of the capital budgeting process.

Question 52

The financial plan includes

A) the strategic plan, financing plan, and options plan.
B) the strategic plan, investment plan, and financing plan.
C) the financing plan, investment plan, and options plan.
D) none of the above.

Question 53

Planning models that are more sophisticated than the percent of sales method have

A) all variable costs change directly with sales.
B) working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales.
C) fixed assets that do not always vary directly with sales.
D) All of the above are true.

Question 54

Which one of the following is NOT an input in financial planning models?

A) Financial statements
B) Pro forma financial statements
C) Investment decisions
D) Financing decisions

Question 55

In using more sophisticated planning models, which one of the following statements is NOT true?

A) Current liabilities are likely to vary directly with sales.
B) Long-term liabilities and equity accounts change as a direct result of managerial decisions.
C) Retained earnings will vary directly as sales changes.
D) All of the above are true

Question 56

Which one of the following is NOT true about the capital budgeting process?

A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders.
B) Senior management reviews the list.
C) The list is revised to comply with the firm's budget constraints.
D) All of the above are true of the capital budgeting process.

Question 57

Which one of the following statements is NOT true?

A) Sales forecasts models are typically very basic and use no complicated analysis.
B) are generated within the firm.
C) utilize macroeconomic variables as input.
D) All of the above are true.

Question 58

Which one of the following is true about capital expenditures?

A) It is part of a firm's investment plan.
B) Once a capital investment is made, they are almost always impossible to reverse.
C) Capital expenditures can be one-time investments or routine investments that allow the firm to continue its operations.
D) All of the above are true of capital investments.

Question 59

Financial planning models

A) help management make investment decisions.
B) help management make financing decisions.
C) make the process speedy and accurate.
D) all of the above are true.

Question 60

Which one of the following is NOT part of a financing plan?

A) The dollar amount of funds that has to be raised externally and the sources of funds available to the firm
B) The desired capital structure for the firm
C) The firm's dividend policy
D) All of the above are part of a financial plan.

Question 61

Addition to retained earnings: Hilton Corp. has revenues of $1,214,800 and costs of $816,355, and pays a tax rate of 32 percent. If the firm pays out 50 percent of its earnings as dividends every year, what is the amount of retained earnings?

A) $135,471.30
B) $270,942.60
C) $413,032.00
D) None of the above.

Question 62

In accounting for changes in fixed assets, which one of the following statements is NOT true?

A) When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets.
B) Since it requires time to get new assets operational, they are added in small discrete quantities.
C) Fixed assets are added in large discrete amounts called lumpy assets.
D) All of the above are true.

Question 63

Capital intensity ratio: Comacho Traders has total assets of $513,480 and sales of $723,062. What is the firm's capital intensity ratio?

A) 1.41
B) 0.71
C) 1.23
D) None of the above.

Question 64

Internal growth rate: Swan Supply Company has net income of $1,212,335 on assets of $12,522,788 and retains 70 percent of its income every year. What is the company's internal growth rate?

A) 7.6%
B) 6.8%
C) 8.6%
D) 9.3%.

Question 65

Firms that achieve higher growth rates without seeking external financing

A) have a low plowback ratio.
B) have less equity and/or are able to generate high net income leading to a high ROE.
C) are highly leveraged.
D) None of the above.

Question 66

Internal growth rate: Mercantile Company has net income of $3,413,500 on assets of $16,109,445 and retains 55 percent of its income every year. What is the company's internal growth rate?

A) 21.2%
B) 8.6%
C) 11.7%
D) 9.4%

Question 67

Which one of the following statements about the sustainable growth rate (SGR) is NOT true?

A) The higher a firm's ROE, the higher the SGR.
B) The higher the plowback ratio, the larger the proportion of net income retained in the firm and the greater the firm's SGR.
C) Both a and b are true
D) None of the above.

Question 68

Retention ratio: A firm paid out $163,961.60 as dividends on net income of $298,112. What is the firm's retention ratio?

A) 55%
B) 45%
C) 50%
D) None of the above.

Question 69

Which one of the following statements is NOT true?

A) The internal growth rate (IGR) is defined as the maximum growth rate that a firm can achieve without external financing.
B) The higher the retained earnings generated by a firm, the higher the growth possible without using external funding.
C) Given the same level of retained earnings, a firm that has the higher amount of total assets, the higher the growth possible without using external funding.
D) All of the above are true.

Question 70

Which one of the following statements about the sustainable growth rate (SGR) is NOT true?

A) The SGR is a function of the plowback ratio and the ROE.
B) The SGR determines the rate of growth that the firm can sustain without selling additional shares of equity.
C) The SGR helps management determine whether they can avoid issuing new debt.
D) All of the above are true of the SGR.

Question 71

Capital intensity ratio: Michael Holdings, Inc., has total assets of $1,480,072 and sales of $2,236,625. What is the firm's capital intensity ratio?

A) 66.2%
B) 53.7%
C) 151.1%
D) None of the above.

Question 72

Capital intensity ratio: Dennis Compton, Inc., has total assets of $5,335,901 and a capital intensity of 53.9%. What is the firm's sales?

A) $5,335,901
B) $2,828,028
C) $9,899,631
D) None of the above.

Question 73

Payout and retention ratio: Tradewinds Corp. has revenues of $9,651,220, costs of $6,080,412, interest payment of $511,233, and a tax rate of 34 percent. It paid dividends of $1,384,125 to shareholders. Find the firm's dividend payout ratio and retention ratio.

A) 66%, 34%
B) 25%, 75%
C) 69%, 31%
D) 34%, 66%

Question 74

Firms that achieve higher growth rates without seeking external financing

A) have a high plowback ratio.
B) have less equity and/or are able to generate high net income leading to a high ROE.
C) are not highly leveraged.
D) All of the above are true.

Question 75

Addition to retained earnings: Tangent, Inc., has revenues of $4,375,233 and costs of $2,467,321, and pays a tax rate of 34 percent. If the firm pays out 60 percent of its earnings as dividends every year, what is the amount of retained earnings?

A) $171,254.18
B) $755,533.15
C) $503,688.77
D) None of the above.

Question 76

Payout and retention ratio: Drekker, Inc., has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm's dividend payout ratio and retention ratio.

A) 85%, 15%
B) 45%, 55%
C) 55%, 45%
D) 15%, 85%

Question 77

Some weaknesses in financial planning models include:

A) Interest expense is not accounted for.
B) All working capital accounts do not necessarily vary directly with sales, especially cash and inventory.
C) How fixed assets are adjusted.
D) All of the above are weaknesses.

Question 78

External funding needed (EFN) is

A) the additional debt or equity a firm needs to issue so that it can purchase additional assets to support an increase in sales.
B) the additional funds raised by a firm to pay off existing short-term debt.
C) the additional funds raised by a firm to pay off existing long-term debt.
D) None of the above are true.

Question 79

The sustainable growth rate (SGR)

A) is a function of the plowback ratio and the ROE.
B) the rate of growth that the firm can sustain without selling additional shares of equity.
C) helps management determine whether they can avoid issuing new equity.
D) All of the above are true of the SGR.

Question 80

In accounting for changes in fixed assets, which one of the following statements is NOT true?

A) When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets.
B) Since it requires time to get new assets operational, they are added as the firm nears full capacity.
C) Fixed assets are added in large discrete amounts called lumpy assets.
D) All of the above are true.