Question 1

In any financial plan, forecasting interest depends on knowing debt, and forecasting debt depends on knowing interest. This problem of "circularity" can be solved with:

Accepted Answer

An iterative technique involves making an initial estimate, using it to calculate another estimate, and repeating the process until a satisfactory result is achieved. This is a common method used to solve circularity problems in financial planning. By starting with an initial estimate for interest and debt, you can iteratively adjust these values until they converge on a solution that is consistent with all of the other planning assumptions. This is much more practical than attempting to solve the circularity problem through counter-circular reasoning, making additional assumptions, or using calculus.

Question 2

A firm had year-end retained earnings of $64,100,000. It forecasts net income for the coming year to be $9,400,000. If it plans to pay out 40% of its net income as dividends, what is the estimated balance in retained earnings at the end of the coming year?

Accepted Answer

The answer of A firm had year-end retained earnings of...

Question 3

An important reason for making financial projections is forecasting whether the firm will need money from outside sources in the coming year. If the planning assumptions result in a need for extra money, it shows up in the plan as:

Accepted Answer

If the financial projections show a need for extra money, it means that the expenses are likely to be higher than the revenues and the company may need to borrow money to cover the shortfall. This would result in an increase in debt, which is reflected on the balance sheet as a liability. A negative net income or equity account may also indicate financial stress, but an increase in debt is a more direct indicator of the need for funding. A drop in revenue may also be a factor, but it is not the only factor to consider when assessing the need for external financing.

Question 4

Considering each action independently and holding other things constant, which of the following would DECREASE new debt financing needed?

Accepted Answer

A decrease in the dividend payout ratio, a decrease in the tax rate, and a decrease in fixed assets would all decrease new debt financing needed.

Question 5

Which of the following is FALSE regarding the business plans of small business?

Accepted Answer

The answer of Which of the following is FALSE regarding...

Question 6

Which of the following is most likely to occur if a firm's equity does not grow as fast as its assets in the long run?

Accepted Answer

If a firm's equity does not grow as fast as its assets in the long run, it means that the firm is relying more on debt to finance its growth. As a result, the long-term debt will increase.

Question 7

Holding all other things constant, additional debt financing needed would be reduced with an INCREASE in the firm's:

Accepted Answer

A higher return on sales means the firm is generating more revenue per dollar spent, which can result in higher profits and cash flows. This can allow the firm to rely less on debt financing and instead finance its operations through its own earnings.

Question 8

Which of the following would decrease the sustainable growth rate if all other variables are held constant?

Accepted Answer

The answer of Which of the following would decrease the...

Question 9

Solving the debt/interest problem using an iterative, numerical approach begins with taking a guess at:

Accepted Answer

The answer of Solving the debt/interest problem using an iterative,...

Question 10

Holding all other variables constant, which of the following would increase a firm's external funding requirements in the planning period?

Accepted Answer

All the options listed would increase a firm's external funding requirements. An increase in assets (A) would require more funding to finance the additional assets. A decrease in accruals (B) means less non-cash earnings are being counted towards income, which could necessitate more external funding to cover operations or investments. An increase in dividends paid (C) would require more cash, potentially leading to a need for external financing if internal funds are insufficient.

Question 11

Which of the following is a long-term exercise in which managers try to predict what the business will do in rough terms?

Accepted Answer

Strategic planning is a long-term exercise in which managers try to predict the future direction of the business in rough terms. Operational planning is focused on short-term goals and day-to-day operations, while budgeting involves setting financial targets for the upcoming period. Controlling involves monitoring performance against established goals and making necessary adjustments.

Question 12

Management wishes to reduce next year's external funding needs. Which of the following will accomplish this task?

Accepted Answer

Decreasing the dividend payout ratio will reduce the amount of earnings that are paid out to shareholders as dividends, which can be used to finance the company's operations and reduce the need for external funding. Decreasing profit margins would lead to a decrease in earnings, which would increase the need for external funding. Increasing the assets/sales ratio would require the company to increase its assets or decrease its sales, which may not be feasible or desirable for the company. Option D is not a valid choice as there is at least one correct answer.

Question 13

Which of the following is true of the sustainable growth rate concept?

Accepted Answer

The sustainable growth rate concept assumes that the firm doesn't raise any new equity by selling stock. The concept calculates the rate at which a company can grow without taking on additional external funding, which includes the issuance of new equity.

Question 14

Which of the following is true of top-down or bottom-up planning?

Accepted Answer

Bottom-up planning involves the input and feedback from lower-level employees, which then gets consolidated as it moves up the hierarchy. This process does not inherently exclude judgment by top-level executives; rather, it incorporates insights from all levels of the organization, including strategic oversight and adjustments by top management.

Question 15

Which of the following is true of the financial plan in a reasonably well managed company?

Accepted Answer

The financial plan in a reasonably well-managed company should establish measurable goals that result in bonus compensation if achieved. This incentivizes employees to work towards achieving the goals outlined in the plan. Option A is incorrect as the plan should not always follow the aggressive optimism strategy, as it can lead to unrealistic expectations and poor decision-making. Option C is incorrect as stretch goals serve as targets towards which the organization strives, but they may not always be achieved. Option D is incorrect as bottom-up phenomenon can lead to the understating of achievable performance, not overstating.

Question 16

External funding requirements can be estimated using an equation called the EFR relationship. The simple concept behind this equation is that funds will be needed to the extent of forecasted:

Accepted Answer

The EFR relationship estimates that external funding requirements will be needed to the extent of the forecasted growth in assets minus the growth in current liabilities minus new retained earnings. This equation accounts for both the increase in assets and the financing of that increase through external funding, which can come in the form of debt or equity.

Question 17

Which of the following is an indirect planning assumption?

Accepted Answer

An improvement in the average collection period from 45 to 40 days is an indirect planning assumption because it is not directly under the control of the company.

Question 18

Assume the following facts about a firm:  If sales are evenly distributed throughout the year, what is the next year's projected ending accounts receivable balance?

Accepted Answer

The answer of Assume the following facts about a firm:...

Question 19

Which of the following best describes a firm's external funding requirement?

Accepted Answer

A firm's external funding requirement is essentially the amount of financing needed to cover the shortfall between what it needs for growth (in terms of assets) and what it can generate internally (through net income or retained earnings). This is calculated as the growth in assets minus the growth in current liabilities (which can finance some of the asset growth) minus the year's retained earnings (which is part of the net income that is not distributed as dividends and can also finance asset growth).

Question 20

You're the treasurer of Ipswitch Inc. The president has just had the staff produce a top-down plan that shows great improvements on every issue many of which you seriously doubt will be achieved. The plan will be shared with securities analysts from Wall Street shortly. You're having a private meeting with the bank's loan officer to plan next year's borrowing needs. You should:

Accepted Answer

The best option is to share some scenario analyses with the banker, as this will allow for a more realistic discussion of borrowing needs based on various potential outcomes. It is important to be transparent and honest with the banker to establish a good relationship and avoid potential issues with cash flow. Option A and B involve being dishonest with the banker, which is unethical and could lead to serious consequences. Option C involves running away from the problem rather than addressing it, which is not a responsible solution.

Quiz 4: Financial Planning