Deck 18: Financial Modeling and Pro Forma Analysis

Question 1

Calgary Doughnuts had sales of $200 million in 2007. Its cost of sales were $160 million. If sales are expected to grow at 10% in 2008, compute the forecasted costs using the percent of sales method.

A) $160 million
B) $170 million
C) $173 million
D) $176 million

Answer 1

$176 million

Question 2

Use the information about Billy's Burgers to answer the following question(s):
Billy's Burgers

Using the percent of sales method, and assuming 20% growth in sales, estimate Billy's Burgers' depreciation for 2011.

A) $17.2 million
B) $50.8 million
C) $12.0 million
D) $20.6 million

Answer 2

$20.6 million

Question 3

Use the information about Billy's Burgers to answer the following question(s):
Billy's Burgers

Using the percent of sales method, and assuming 20% growth in sales, estimate Billy's Burgers' Accounts Payable for 2011.

A) $21.0 million
B) $25.2 million
C) $18.0 million
D) $21.6 million

Answer 3

$21.6 million

Question 4

Long term financial planning allows a financial manager to understand the business by ________ between sales, costs, capital investments and financing.

A) increasing the spread between
B) identifying linkages
C) decreasing the spread between
D) identify wastage

Question 5

Use the information about Billy's Burgers to answer the following question(s):
Billy's Burgers

Using the percent of sales method, and assuming 20% growth in sales and no change in interest expense, estimate Billy's Burgers' Pretax Income for 2011.

A) $23.28 million
B) $35.76 million
C) $24.84 million
D) $38.16 million

Question 6

Use the information about Billy's Burgers to answer the following question(s):
Billy's Burgers

Using the percent of sales method, and assuming 20% growth in sales, estimate Billy's Burgers' Accounts Receivable for 2011.

A) $21.0 million
B) $25.2 million
C) $18.0 million
D) $21.6 million

Question 7

The goal of the financial manager is to maximize the value of the shareholders' stake in the firm.

Question 8

The ________ method assumes that as sales grow, many income statement and balance sheet items will grow, remaining the same percent of sales.

A) percent of income
B) percent of liabilities
C) percent of sales
D) percent of assets

Question 9

________ is the amount of additional external financing needed to fund planned increases in assets.

A) Net new financing
B) Equity issuance
C) Debt issuance
D) Preferred stock issuance

Question 10

Use the information about Billy's Burgers to answer the following question(s):
Billy's Burgers

Using the percent of sales method, and assuming 20% growth in sales and no change in interest expense, estimate Billy's Burgers' Net Income for 2011.

A) $23.28 million
B) $35.76 million
C) $24.84 million
D) $28.16 million

Question 11

The asset and liability side of a pro forma balance sheet projection will not balance, in general, unless we make assumptions about how ________ and ________ will grow with sales.

A) dividends, equity
B) coupons, debt
C) debt, equity
D) dividends, preferred stock

Question 12

Which of the following accounts may reasonably be expected to grow with sales?
I. Accounts Receivable
II. Accounts Payable
III. Property, Plant and Equipment
IV. Inventory
V. Long-Term Debt

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

Question 13

Forecasting a balance sheet with percent of sales method requires two passes-a first pass to determine financing needs and a second pass that shows the sources and amounts of financing.

Question 14

Calgary Doughnuts had sales of $100 million in 2007. Its cost of sales were $70 million. If sales are expected to grow at 20% in 2008, compute the forecasted costs using the percent of sales method.

A) $80 million
B) $84 million
C) $88 million
D) $96 million

Question 15

While the assets and accounts payable of a firm may reasonably be expected to grow with sales, ________ will not naturally grow with sales.

A) cash
B) supplier credit
C) long term debt
D) cost of sales

Question 16

Calgary Doughnuts had sales of $300 million in 2007. Its cost of sales were $200 million. If sales are expected to grow at 15% in 2008, compute the forecasted costs using the percent of sales method.

A) $210 million
B) $215 million
C) $225 million
D) $230 million

Question 17

Long term financial planning helps a financial manager in budgeting but has little to do with understanding how the business operates.

Question 18

If a firm is planning an expansion or changes in how it manages its inventory, long term financial planning can help determine the impact on the firm's ________.

A) debt financing
B) capital investment
C) free cash flows
D) all of the above

Question 19

Building a model for long-term forecasting reveals points in the future where the firm will have ________.

A) excess cash that can be used for dividends, debt repayment, or stock repurchases
B) cash needs that must be funded with external financing
C) a need for expanding property, plant and equipment to meet increases in capacity
D) all of the above

Question 20

Building a model for long-term forecasting reveals points in the future where the firm will need ________ when retained earnings are not enough to fund planned future investments.

A) external financing
B) stock dividends
C) dividend payments
D) mergers

Question 21

Use the table for the question(s) below.
Ideko Sales and Operating Cost Assumptions

Based upon Ideko's Sales and Operating Cost Assumptions, what production capacity will Ideko require in 2007?

A) 1,505,000 units
B) 1,323,000 units
C) 1,914,000 units
D) 1,115,000 units
E) 1,702,000 units

Question 22

How do we compute net new financing?

Question 23

One of the shortcomings of the percent of sales method is that it does not account for the fact that capacity changes are lumpy and not incremental.

Question 24

A services firm does all its business in cash only. The firm projects a cash balance of $3,000 in its account after all taxes and costs are paid. The owners plan to invest $8,000 and pay a dividend of $1000. How much net new financing is needed?

A) $4,000
B) $5,000
C) $6,000
D) $7,000

Question 25

Use the table for the question(s) below.
Ideko Sales and Operating Cost Assumptions

Based upon Ideko's Sales and Operating Cost Assumptions, what production capacity will Ideko require in 2009?

A) 1,505,000 units
B) 1,115,000 units
C) 1,323,000 units
D) 1,701,700 units
E) 1,914,000 units

Question 26

LG Inc. has done a long-term forecast of its balance sheet. The projected total assets for the next year are $100 million. The current liabilities are projected to be $40 million and other long term liabilities are $30 million. How much net new financing is needed in the following year?

A) $18 million
B) $22 million
C) $25 million
D) $30 million

Question 27

What is the implied assumption in percent of sales method?

Question 28

A services firm does all its business in cash only. The firm projects a cash balance of $4,000 in its account after all taxes and costs are paid. The owners plan to invest $7,000 and pay a dividend of $1,000. How much net new financing is needed?

A) $4,000
B) $5,000
C) $6,000
D) $7,000

Question 29

A services firm does all its business in cash only. The firm projects a cash balance of $2,000 in its account after all taxes and costs are paid. The owners plan to invest $5,000 and pay a dividend of $1000. How much net new financing is needed?

A) $4,000
B) $5,000
C) $6,000
D) $7,000

Question 30

The percent of sales method relies on the idea that capacity increases are ________, even though in practice such increases are ________.

A) incremental, lumpy
B) incremental, incremental
C) lumpy, incremental
D) lumpy, lumpy

Question 31

What is net new financing?

Question 32

The market size for Loppins is 60 million units. If SPI Inc. has a market share of 20% and the average sales price is $3 per Loppin, what is the dollar amount of sales of SPI?

A) $32 million
B) $36 million
C) $38 million
D) $42 million

Question 33

The market size for Loppins is 40 million units. If SPI Inc. has a market share of 40% and the average sales price is $3 per Loppin, what is the dollar amount of sales of SPI?

A) $32 million
B) $48 million
C) $58 million
D) $62 million

Question 34

When the projected liabilities and equity are greater than the assets, the firm can plan to ________.

A) retain extra cash
B) pay dividends
C) retire debt
D) all of the above

Question 35

When making long term plans, any increases in ________ and ________ reflect capital structure decisions that require managers to actively raise capital.

A) debt, equity
B) debt, assets
C) assets, equity
D) current ratio, equity

Question 36

LG Inc. has done a long-term forecast of its balance sheet. The projected total assets for the next year are $300 million. The current liabilities are projected to be $170 million and other long term liabilities are $70 million. How net new financing is needed in the following year?

A) $58 million
B) $60 million
C) $65 million
D) $70 million

Question 37

The market size for Loppins is 80 million units. If SPI Inc. has a market share of 30% and the average sales price is $2 per Loppin, what is the dollar amount of sales of SPI?

A) $40 million
B) $42 million
C) $45 million
D) $48 million

Question 38

What is common starting point for forecasting?

Question 39

The amount of dividends a company pays will affect the ________ it has to finance future growth.

A) debt
B) retained earnings
C) current liabilities
D) current ratio

Question 40

LG Inc. has done a long-term forecast of its balance sheet. The projected total assets for the next year are $200 million. The current liabilities are projected to be $100 million and other long term liabilities are $70 million. How much net new financing is needed in the following year?

A) $18 million
B) $22 million
C) $25 million
D) $30 million

Question 41

________ is the maximum growth rate a firm can achieve without resorting to external financing.

A) Return on equity
B) Sustainable growth rate
C) Retention rate
D) Internal growth rate

Question 42

Use the table for the question(s) below.
Ideko Sales and Operating Cost Assumptions

Based upon Ideko's Sales and Operating Cost Assumptions, what production capacity will Ideko require in 2008?

A) 1,702,000 units
B) 1,323,000 units
C) 1,504,880 units
D) 1,914,000 units
E) 1,115,000 units

Question 43

What is minimum required cash?

Question 44

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2010-2015
Pro Forma Balance Sheet for Ideko, 2010-2015

The amount of net working capital for Ideko in 2011 is closest to ________.

A) $30,510
B) $22,750
C) $28,170
D) $35,195

Question 45

A firm has $50 million in equity and $20 million of debt, it pays dividends of 30% of net income, and has a net income of $10 million. What is the firm's sustainable growth rate?

A) 12%
B) 13%
C) 14%
D) 15%

Question 46

The maximum growth rate that a firm can achieve without issuing new equity or by increasing its debt to equity ratio is the firm's sustainable growth rate.

Question 47

What are a firm's options when it generates more cash than planned?

Question 48

With the proper changes it is believed that Ideko's credit policies will extend a 60 days credit period to accounts receivables. The forecasted accounts receivable for Ideko in 2012 is closest to ________.

A) $14,525
B) $16,970
C) $22,710
D) $19,690

Question 49

The sustainable growth rate assumes that the firm will raise no new debt financing.

Question 50

A firm has $50 million in equity and $20 million of debt, it pays dividends of 30% of net income, and has a net income of $10 million. What is the firm's internal growth rate?

A) 9%
B) 10%
C) 11%
D) 12%

Question 51

Internal growth rate indicates whether a planned investment will increase or decrease firm value.

Question 52

A firm has $40 million in equity and $20 million of debt, it pays dividends of 20% of net income, and has a net income of $10 million. What is the firm's internal growth rate?

A) 12.2%
B) 13.3%
C) 14.1%
D) 15.2%

Question 53

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2010-2015
Pro Forma Balance Sheet for Ideko, 2010-2015

The amount of net working capital for Ideko in 2010 is closest to ________.

A) $26,200
B) $35,195
C) $30,510
D) $29,420

Question 54

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2010-2015
Pro Forma Balance Sheet for Ideko, 2010-2015

The amount of the increase in net working capital for Ideko in 2012 is closest to ________.

A) $4,685
B) $4,920
C) $3,665
D) $5,230

Question 55

A firm has $70 million in equity and $30 million of debt, it pays dividends of 30% of net income, and has a net income of $10 million. What is the firm's internal growth rate?

A) 6%
B) 7%
C) 8%
D) 9%

Question 56

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2010-2015
Pro Forma Balance Sheet for Ideko, 2010-2015

The amount of the decrease in net working capital for Ideko in 2011 is closest to ________.

A) $4,090
B) $4,685
C) $3,410
D) $5,230

Question 57

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2010-2015
Pro Forma Balance Sheet for Ideko, 2010-2015

The amount of net working capital for Ideko in 2012 is closest to ________.

A) $35,195
B) $42,420
C) $22,170
D) $26,420

Question 58

Internal growth rate assumes that the firm can finance investments via sale of debt.

Question 59

A firm has $20 million in equity and $20 million of debt, it pays dividends of 20% of net income, and has a net income of $5 million. What is the firm's sustainable growth rate?

A) 18%
B) 19%
C) 20%
D) 21%

Question 60

With the proper changes it is believed that Ideko's credit policies will extend a 60 days credit period to accounts receivables. The forecasted accounts receivable for Ideko in 2013 is closest to ________.

A) $14,525
B) $19,690
C) 22,710
D) $16,970

Question 61

Pledrea Inc. has EBITDA at the forecast horizon of $10,000. Its EBITDA multiple is 11. What is the terminal value of the firm at the forecast horizon?

A) $100,000
B) $110,000
C) $120,000
D) $130,000

Question 62

Compute the value of a firm with free cash flows of $4,000, $4,500, and $5,000 over the next three years, a terminal firm value of $60,000 after three years, and the unlevered cost of capital is 10%. Assume that the interest rate tax shield is zero.

A) $56,191
B) $57,234
C) $58,098
D) $59,123

Question 63

What is the free cash flow to equity holders for a firm with free cash flow of $7000, after-tax interest expense of $1,000, and an increase in debt of $3,000?

A) $6,000
B) $7,000
C) $8,000
D) $9,000

Question 64

Given the following data for a given period, compute the free cash flow to the firm:
Net Income = $5,000
After-tax Interest Expense = $500
Depreciation = $500
Increase in NWC = $1,000
Capital Expenditures = $2,000

A) $3,000
B) $3,500
C) $3,700
D) $3,900

Question 65

Compute the after-tax interest expense for a firm with Interest on Excess Cash = $5,000, Interest on Debt = $8,000, and a tax rate of 30%.

A) $2,100
B) $2,200
C) $2,500
D) $2,700

Question 66

Given the following data for a given period, compute the free cash flow to the firm:
Net Income = $10,000
After-tax Interest Expense = $1,000
Depreciation = $1,000
Increase in NWC = $1,000
Capital Expenditures = $2,000

A) $9,000
B) $9,500
C) $9,700
D) $9,900

Question 67

Pledrea Inc. has EBITDA at the forecast horizon of $13,000. Its EBITDA multiple is 10. What is the terminal value of the firm at the forecast horizon?

A) $100,000
B) $110,000
C) $120,000
D) $130,000

Question 68

Total working capital rather than changes in working capital has implications for cash flows.

Question 69

Given the following data for a given period, compute the free cash flow to the firm:
Net Income = $12,000
After-tax Interest Expense = $2,000
Depreciation = $1,000
Increase in NWC = $2,000
Capital Expenditures = $1,000

A) $10,000
B) $11,000
C) $12,000
D) $13,000

Question 70

What is the free cash flow to equity holders for a firm with free cash flow of $9,000, after-tax interest expense of $3,000, and an increase in debt of $1,000?

A) $6,000
B) $7,000
C) $8,000
D) $9,000

Question 71

A firm has $80 million in equity and $40 million of debt, it pays dividends of 20% of net income, and has a net income of $10 million. What is the firm's sustainable growth rate?

A) 7%
B) 8%
C) 9%
D) 10%

Question 72

Compute the after-tax interest expense for a firm with Interest on Excess Cash = $2,000, Interest on Debt = $7,000, and a tax rate of 30%.

A) $2,500
B) $2,800
C) $3,100
D) $3,500

Question 73

What is the free cash flow to equity holders for a firm with free cash flow of $11,000, after-tax interest expense of $2,000, and an increase in debt of $2,000?

A) $7,000
B) $8,000
C) $9,000
D) $11,000

Question 74

The estimate of a firm's value at the end of the forecast horizon using a valuation multiple is also called its ________.

A) fixed value
B) payback value
C) terminal value
D) none of the above

Question 75

Compute the after-tax interest expense for a firm with Interest on Excess Cash = $1,000, Interest on Debt = $5,000, and a tax rate of 30%.

A) $2,500
B) $2,800
C) $3,100
D) $3,300

Question 76

Pledrea Inc. has EBITDA at the forecast horizon of $10,000. Its EBITDA multiple is 12. What is the terminal value of the firm at the forecast horizon?

A) $100,000
B) $110,000
C) $120,000
D) $130,000

Question 77

For valuing a planned expansion, in addition to forecasting cash flows we need to estimate the firm's continuation value.

Question 78

Compute the value of a firm with free cash flows of $1,000, $2,500, and $3,000 over the next three years, a terminal firm value of $40,000 after three years, and the unlevered cost of capital is 15%. Assume that the interest rate tax shield is zero.

A) $26,191
B) $27,234
C) $31,033
D) $39,343

Question 79

A firm expects growth next year to be 10%. Its sustainable growth rate is 12%. Which of the following is true?

A) The firm will need to raise additional debt such that its debt to equity ratio will increase.
B) The firm may be able to keep its debt to equity ratio the same by reducing dividends (assuming they are projected to be high enough).
C) The firm will need to raise additional capital through a stock issue.
D) The firm will have excess cash to increase dividends, pay back debt, or repurchase equity.

Question 80

A firm expects growth next year to be 12%. Its sustainable growth rate is 10%. Which of the following is true?

A) The firm will need to raise additional debt such that its debt to equity ratio will increase.
B) The firm may be able to keep its debt to equity ratio the same by reducing dividends (assuming they are projected to be high enough).
C) The firm will need to raise additional capital through a stock issue.
D) The firm will have excess cash to increase dividends, pay back debt, or repurchase equity.