Question 1

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 are achievable and result in bonus compensation if achieved. This provides motivation for employees to work towards achieving the goals and helps to align individual and organizational objectives. Option A is incorrect because following an aggressive optimism strategy could lead to overestimating performance and making unrealistic goals. Option C is incorrect because stretch goals are designed to be challenging and not always achievable. Option D is partially correct because there is a risk of overstating achievable performance, but this is not limited to stretch goals and can occur with any financial plan.

Question 2

Which of the following is not a true statement about top-down or bottom-up planning?

Accepted Answer

This statement is not entirely true because top-down plans can also be aggressive and ambitious, especially if they are attempting to drive rapid growth or transformation in the organization. Therefore, it is not always the case that top-down plans are conservative.

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 firm will need to increase its financing sources. This may involve taking on additional debt or other forms of financing, leading to an increase in overall debt levels. Therefore, choice C is the most likely outcome. Options A and D are not necessary outcomes of needing additional financing, and option B does not necessarily reflect the need for outside funding.

Question 4

____ increases the risk in financial planning.

Accepted Answer

The answer of ____ increases the risk in financial planning.
...

Question 5

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 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 will have to rely on borrowing more long-term debt to finance its assets, resulting in an increase in long-term debt.

Question 7

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 8

Computers:

Accepted Answer

While computers have certainly made financial planning more accessible, they cannot replace the need for experience and judgment in making assumptions. Furthermore, computers make it much easier to assess risk through scenario analysis, so both options B and C are correct.

Question 9

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

Accepted Answer

An increase in the dividend payout ratio (choice A) would decrease the amount of earnings retained, thus decreasing the amount available for reinvestment and ultimately lowering the sustainable growth rate. An increase in equity (choice B) would increase the amount of equity financing, which is more expensive than debt financing and would therefore lower the return on equity and sustainable growth rate. An increase in net income (choice C) would increase the amount available for reinvestment and thus increase the sustainable growth rate. Therefore, only choices A and B would decrease the sustainable growth rate, while choice C would increase it.

Question 10

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 11

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

Accepted Answer

Return on sales is a measure of the firm's profitability, so an increase in this ratio implies that the firm is generating more income from its operations. This, in turn, would reduce the amount of debt financing needed since the firm would have more internal funds to finance its investments or growth opportunities. A higher dividend payout, cost ratio, or tax rate would not necessarily have a direct impact on the firm's need for additional debt financing.

Question 12

Corporate business plans:

Accepted Answer

Corporate business plans typically aim to present a positive and optimistic outlook to stakeholders, including shareholders, investors, and employees. As such, they often forecast significant improvements in various areas, even if achieving those goals may be challenging. This is because upbeat projections can help increase confidence in the organization's leadership, attract investors and customers, and motivate employees to work harder to achieve those targets. However, this does not mean that business plans are deliberately dishonest or misleading, and they may also acknowledge potential risks and challenges.

Question 13

Assume the following facts about a firm: $\begin{array}{ll}
\text { Projected selling price per urit } & \$ 3.70 / \text { unit } \
\text { Projected monthly urit sales } & 300,000 \text { urits } \
\text { Typical receivables balance } & 1.5 \text { months of sales }
\end{array}$ If sales are evenly distributed throughout the year, what is the next year's projected ending accounts receivable balance?

Accepted Answer

The projected ending accounts receivable balance is equal to the typical receivables balance multiplied by the projected monthly unit sales multiplied by the projected selling price per unit. In this case, the typical receivables balance is 1.5 months of sales, the projected monthly unit sales are 300,000 units, and the projected selling price per unit is $3.70. Therefore, the projected ending accounts receivable balance is 1.5 * 300,000 * $3.70 = $1,665,000.

Question 14

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 would result in retaining more earnings, which would increase the company's internal funding and reduce the need for external funding. Decreasing profit margins would likely decrease the company's cash flow, thus increasing the need for external funding. Increasing the assets/sales ratio would require the company to make investments that would increase its assets but could also increase its need for external funding.

Question 15

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

Accepted Answer

The sustainable growth rate concept assumes that the firm does not raise any new equity by selling stock. This means that the growth must come from internal sources, such as retained earnings, and that the firm cannot rely on external funding to finance its growth.

Question 16

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

Accepted Answer

The answer of Considering each action independently and holding other...

Question 17

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

Accepted Answer

While it is important to set challenging goals, setting goals that are completely out of reach can be demotivating for employees and may result in a lack of effort or engagement. Goals should be challenging but also achievable with effort and focus.

Question 18

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 choice is to share some scenario analyses with the banker. This shows transparency and honesty while also allowing for more realistic borrowing needs to be discussed. It also helps to prepare for any potential cash flow issues that may arise. Option A and B involve dishonesty and can lead to serious consequences, while option C involves running away from the problem instead of facing it.

Question 19

Falcon's projected 20X5 sales are $678 and its 20X4 year-end retained earnings were $1,385. If Falcon projects a 7 percent return on sale (ROS) and expects to pay $12 in total dividends in 20X5, forecast 20X5 year-end retained earnings.

Accepted Answer

1. Calculate the net income for 20X5: 
Net income = 678 * 7% = 47.46

2. Calculate the 20X5 year-end retained earnings: 
Retained earnings = 20X4 year-end retained earnings + net income - dividends 
Retained earnings = 1385 + 47.46 - 12 = 1420.46

Therefore, the answer is C, $1,420.46.

Question 20

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 external funding requirements based on the growth in assets minus the growth in current liabilities minus new retained earnings. This equation takes into account the increase in assets that will be required to support growth and subtracts any increase in current liabilities that can be covered by internally generated funds (retained earnings). Thus, it provides a more accurate estimate of the funds that will need to be raised externally to support growth. Choice A and B do not take into account the growth in current liabilities, which can be funded by retained earnings. Choice C subtracts current liabilities instead of growth in current liabilities, which would not provide an accurate estimate of external funding requirements for growth.

Quiz 4: Financial Planning