Deck 4: Financial Planning

Question 1

An operating plan:

A)translates business ideas into concrete relatively short-term projections.
B)backs up financial projections with a great deal of detail.
C)concentrates on broad strategic issues despite its shorter term focus.
D)a and b

Answer 1

D

Question 2

Although budgeting and forecasting appear similar, forecasting relates to a shorter time horizon and usually focuses on:

A)cash flow and profitability.
B)capital considerations.
C)human resources.
D)meeting engineering goals.

Answer 2

A

Question 3

Which of the following is not a purpose of business planning?

A)Communicating information to investors
B)Making a statement of goals
C)Credibility and supporting detail
D)Provide pro forma statements based on hypothetical circumstances

Answer 3

C

Question 4

Large companies tend to do which of the following types of business planning?

A)Strategic planning
B)Operational planning
C)Budgeting and forecasting
D)All of the above

Question 5

Budgets are usually:

A)short-run supplements to the strategic plans.
B)quarterly updates to the annual operating plans.
C)especially important in stable industries.
D)usually done in great detail by small businesses.

Question 6

Which of the following correctly states the business plan types that contain the lowest and greatest proportions of financial detail?

A)Lowest - strategic planning; greatest - budgeting
B)Lowest - forecasting; greatest - operational planning
C)Lowest - strategic planning; greatest - forecasting
D)Lowest - operational planning; greatest - budgeting
E)Lowest - forecasting; greatest - budgeting

Question 7

The major audiences for a firm's business plan are:

A)the firm's own management.
B)outside investors.
C)neither a nor b.
D)both a and b.

Question 8

Which of the following sections of a business plan is likely to contain information on why a business is likely to succeed against its competitors?

A)Market analysis
B)Mission and strategy statement
C)Executive Summary
D)Red herring prospectus

Question 9

All of the following would be considered benefits of implementing an effective business plan except:

A)ensuring that the management team has a clear understanding of the goals of the organization.
B)providing details as to how the goals of the organization are going to be achieved.
C)forecasting external financing requirements.
D)providing a vehicle to share information with investors.
E)all of the above are benefits of business planning.

Question 10

Which of the following would not usually be a section of a business plan?

A)Management and staffing
B)Mission and strategy statement
C)Dividend policy
D)Contingencies

Question 11

Strategic planning involves broad thinking about a firm's mission, and goals. It usually has a time frame or planning horizon of:

A)10 to 20 years.
B)one to three years.
C)five years.
D)Any of the above

Question 12

Which of the following is not a major reason for developing a business plan?

A)The process helps pull the management team together.
B)The completed plan is a vehicle for communicating managements vision to others.
C)Planning enables management to defend itself against criticism from disgruntled stockholders.
D)The finished plan serves as a roadmap for running the business.

Question 13

Which of the following can help ensure that everyone understands what they have to do in the coming year?

A)Making different people accountable for same tasks
B)The business planning process
C)Comparing actuals with budgets
D)Making accurate financial plans

Question 14

The managerial value of planning includes:

A)the planning process brings the management team together.
B)a resulting road map for running the business.
C)planning that provides credibility to employees.
D)Both a & b
E)All of the above

Question 15

The time period covered by a business plan is often called the:

A)plan's maturity.
B)budget period.
C)planning horizon.
D)planning quarter.

Question 16

The financial plan is:

A)the financial portion of a business plan.
B)the most important part of the strategic plan.
C)frequently not included in business plans.
D)All of the above

Question 17

Business planning that focuses on short-term financial performance, including cash requirements is called:

A)strategic planning.
B)operational planning.
C)budgeting.
D)forecasting.
E)this level of detail is included in all of the business planning levels.

Question 18

Small business plans differ from large company plans in that:

A)small business plans normally do not discuss strategic planning at all.
B)small business plans usually don't include short-term forecasts.
C)small business plans don't generally discuss the decision to choose the business they are in over others.
D)Both a and b
E)All of the above

Question 19

Business planning that focuses on the next year and includes detailed revenue targets, profit objectives and compensation systems is called:

A)strategic planning.
B)operational planning.
C)budgeting.
D)forecasting.
E)this level of detail is included in all of the business planning levels.

Question 20

Forecasts tend to be:

A)short-term.
B)focused on making either profit or cash flow projections.
C)filled with supporting documentation.
D)Both a & b
E)All of the above

Question 21

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:

A)an iterative technique.
B)a counter-circular reasoning.
C)additional planning assumptions.
D)calculus.

Question 22

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?

A)$53,500,000
B)$61,140,000
C)$67,860,000
D)$73,500,000
E)$69,740,000

Question 23

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:

A)a negative net income.
B)a negative equity account.
C)an increase in debt.
D)a very substantial drop in revenue.

Question 24

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

A)A decrease in the dividend payout ratio
B)A decrease in the tax rate
C)A decrease in fixed assets
D)Both a & b
E)All of the above

Question 25

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

A)Covers the broadest and most basic strategic issues
B)Similar to annual plans of large business
C)Provides thorough rationale for concrete actions
D)Includes elements of strategic planning

Question 26

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?

A)Long-term debt will increase
B)Current liabilities will be reduced
C)Dividend-payout ratio will increase
D)Profit margin will decrease

Question 27

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

A)dividend payout
B)return on Sales
C)cost Ratio
D)tax Rate

Question 28

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

A)Increase in dividend payout ratio
B)An increase in equity
C)An increase in net income
D)Both a & b
E)All of the above

Question 29

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

A)ending debt.
B)beginning debt.
C)interest.
D)equity.

Question 30

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

A)An increase in assets
B)A decrease in accruals
C)An increase in dividends paid
D)Both a & c
E)All of the above

Question 31

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

A)Operational planning
B)Budgeting
C)Strategic planning
D)Controlling

Question 32

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

A)Decrease profit margins
B)Decrease the dividend payout ratio
C)Increase the assets/sales ratio
D)None of the above

Question 33

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

A)It is an empirical measure of a firm's strength.
B)It assumes that the financial ratios change at a constant rate.
C)It assumes that the firm doesn't raise any new equity by selling stock.
D)It is the growth in assets created by additional external funding.

Question 34

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

A)Bottom-up plans tend to overstate achievable performance.
B)Top-down plans are consolidated from lower management's inputs.
C)Bottom-up plans do not include judgment by top-level executives.
D)Top-down plans are usually conservative.

Question 35

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

A)The plan should ideally follow the aggressive optimism strategy.
B)The plan should establish measurable goals which result in bonus compensation if achieved.
C)Its stretch goals serve as targets toward which the organization strives and always achieves.
D)Its stretch goal faces a risk of overstating achievable performance because of the bottom-up phenomenon.

Question 36

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:

A)growth in assets minus new retained earnings.
B)growth in sales minus all current liabilities minus all retained earnings.
C)assets minus current liabilities minus new retained earnings.
D)growth in assets minus growth in current liabilities minus new retained earnings.

Question 37

Which of the following is an indirect planning assumption?

A)A 3% reduction in product price
B)A decrease in interest rates from 8% to 7%
C)An improvement in the average collection period from 45 to 40 days
D)None of the above are indirect assumptions.

Question 38

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?

A)$1,665,000
B)$138,750
C)$1,110,000
D)none of the above

Question 39

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

A)Growth in assets minus growth in liabilities minus net income
B)Growth in assets minus net income
C)Growth in assets minus growth in current liabilities minus net income
D)Growth in assets minus growth in current liabilities minus the year's retained earnings
E)Growth in assets minus the current year's retained earnings

Question 40

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:

A)tell the banker to expect cash flow results in accordance with the official plan, because if the president hears you said anything else he'll fire you.
B)tell the banker the president is an optimist and the bank should be ready to lend Ipswitch a lot more than the plan indicates but you can't tell exactly how much.
C)look for another job because the president is likely to lay the blame for a cash flow miss at your door.
D)share some scenario analyses with the banker.

Question 41

A firm expects next year's sales to be $108,000,000. Estimate the year-end balance in accounts receivable if it expects the average collection period to be 42 days.

A)$ 8,200,000
B)$16,400,000
C)$12,600,000
D)$18,800,000
E)$25,200,000

Question 42

A firm is planning for next year and has developed the following information. What inventory balance should be included in next year's plan if management intends to increase inventory turnover by two turns in the coming year? Calculate using ending balances and the COGS formulation of inventory turnover.

A)$1.74M
B)$1.90M
C)$1.30M
D)$1.24M

Question 43

Hatter Enterprises has a return on sales of 15%, a total asset turnover of 1.2 and an equity multiplier of 2.0. If the company is projecting a dividend payout ratio of 40%, calculate the firms' sustainable growth rate.

A)15.8%
B)17.2%
C)19.4%
D)21.6%

Question 44

If a firm does not pay dividends, what is true about the components of the sustainable growth rate?

A)The dividend payout ratio is 100%.
B)The retention ratio is 100%.
C)ROE does not equal the sustainable growth rate.
D)ROS is higher than if the firm did pay some dividends.

Question 45

A firm is planning for next year and has developed the following information. What inventory balance should be included in next year's plan if management intends to increase inventory turnover by one turn in the coming year? Calculate using ending balances and the COGS formulation of inventory turnover.

A)$1.74M
B)$1.90M
C)$1.58M
D)$1.24M

Question 46

Devin Corporation generally collects 20 percent of its sales in the month of sale, 30 percent in the next month, 40 percent in the next month, and 10 percent in the third month after the sale. Based on a sales forecast of $60 for March, $100 for April, $75 for May, and $85 for June, estimate cash collections for June.

A)$80.5
B)$83.0
C)$85.5
D)$88.5

Question 47

A firm has projected next year's sales at $678 million of which 60 percent will be for cash, and 40 percent will be on credit. Forecast the year-end accounts receivable balance if the firm expects an average collection period of 45 days (assume a 360-day year and calculate using year-end balance).

A)$9.0 million.
B)$13.6 million.
C)$22.6 million.
D)$33.9 million.

Question 48

Which would be credible supporting detail for a forecasted net income?

A)Net income is based on management's goals.
B)Net income is based on a "booming" economy.
C)Net income is based on competitive pricing and industry averages for profit margins.
D)Net income is generated based on a higher profit margin than most other competitors.

Question 49

Riordan Trucking has sales of $18M and an accounts receivable balance of $1M. The firm has projected next year's sales at $24M and wants to reduce ACP by 2 days. Calculate Riordan's projected accounts receivable balance. (Round to the nearest $ and assume 360 days.)

A)$1.0M
B)$1.2M
C)$1.4M
D)$1.6M

Question 50

This year's revenue is $2,000,0000 and the ACP is 75 days. Next year revenue is forecast to grow by 20% and the ACP (based on a year-end balance)is planned to improve to 60 days. What is the forecast for accounts receivable at the end of next year? (Use a 360-day year.)

A)$333,333
B)$500,000
C)$400,000
D)$416,667

Question 51

If a firm does not have any debt, what is true about the components of the sustainable growth rate?

A)The retention ratio is 100%.
B)The dividend payout ratio is 100%.
C)The ROA multiplied by the retention ratio is equal to the sustainable growth rate
D)The ROE is greater than the ROA.

Question 52

Assume the following facts about a firm: The firm's external funding requirement for next year is
( Hint : You don't have to remember the EFR formula. Just realize that the funding requirement is the growth in assets less that in current liabilities less next year's retained earnings. A negative result means surplus funds are available.)

A)$10,800
B)($28,800)
C)($10,800)
D)$28,800

Question 53

A firm has the following balance sheet. It expects sales to increase 30% over the previous year's level of $9,000, and anticipates retaining $3,000 of its earnings. According to the un modified percentage of sales method, the amount of external funds needed will be:

A)$2,400.
B)$6,450.
C)$3,450.
D)None of the above

Question 54

The sustainable growth rate is equal to:

A)the retention ratio multiplied by ROE.
B)the dividend payout ratio multiplied by ROA.
C)the dividend payout ratio multiplied by ROE.
D)the retention ratio multiplied by ROA.

Question 55

A firm is planning for next year and has developed the following information What receivables balance should the firm plan for next year if management intends to reduce the ACP by five days? (Calculate using ending balances and a 360-day year):

A)$1.035M
B)$1.150M
C)$1.265M
D)None of the above

Question 56

Which financial planning assumption does not have supporting detail?

A)Sales growth is based on the inflation rate.
B)Sales growth is based on the industry average sales growth rate.
C)Net income is based on the average net profit margin for the industry.
D)Operating expenses are 70% of the current year's sales.

Question 57

What is the debt/interest planning problem?

A)Planned debt is required to forecast interest, but interest is required to forecast debt.
B)Debt is constant, but interest varies through time.
C)The difficulty of knowing how much debt to issue because net income is constant.
D)The difficulty of knowing how much dividends to pay because debt is constant.

Question 58

Blackstone Inc. has a return on sales of 15%, a total asset turnover of 1.2 and a debt ratio of 30%. If the company is projecting a dividend payout ratio of 80%, calculate the firms' sustainable growth rate.

A)5.15%
B)8.25%
C)10.35%
D)13.45%

Question 59

Which portion of the business plan lays out the basic charter of the business and establishes its long-term direction?

A)Mission statement
B)Market analysis
C)Financial projections
D)Contingencies section

Question 60

Assume the following facts about a firm: The firm's external funding requirement for next year is
( Hint : You don't have to remember the EFR formula. Just realize that the funding requirement is the growth in assets less that in current liabilities less next year's retained earnings.)

A)$1,280
B)($960)
C)$1,760
D)$800

Question 61

The only goal of the planning process it to provide a roadmap for running the business.

Question 62

A financial plan can help in anticipating financing needs.

Question 63

A good business plan shows enough supporting detail to indicate that it is the product of careful thinking.

Question 64

Executive bonuses are often tied to the achievement of goals spelled out within the firm's business plan.

Question 65

Financial planning is the process of projecting a company's financial statements into the future, and is separate and distinct from the broader activity of business planning.

Question 66

The financial plan is essentially a part of a broader activity known as business planning.

Question 67

In large companies, business plans are developed at decentralized divisions and consolidated upward. Division plans are generally not reviewed and discussed by corporate management.

Question 68

A good business plan conveys a comprehensive image of the firm's future including information about products, markets, employees, technology, facilities, capital, revenue, profitability, and anything else that might be relevant.

Question 69

The financial plan is essentially a chapter or section of a business plan.

Question 70

Small firm planning processes cover the same spectrum with respect to time horizon and detail as large firm processes.

Question 71

Business plans and the information they contain are generally very private, and are not shared with investors or securities analysts.

Question 72

A model of what management expects a business to become in the future expressed in words and financial projections is a:

A)cost ratio.
B)cash budget.
C)business plan.
D)stretch plan.

Question 73

The annual _____ plan projects the business in detail over a year; and is the most important planning exercise.

A)budget
B)operating
C)capitalization
D)strategic

Question 74

An expected physical or economic condition that dictates the size of one or more financial statement items is a:

A)cash budget.
B)stretch plan.
C)planning assumption.
D)sustainable growth rate.

Question 75

The most common time horizon for strategic plans is ten years.

Question 76

The business plan is a vehicle for communicating with potential investors.

Question 77

A budget is a longer term bridge between an annual operating plan and the five-year strategic plan.

Question 78

A firm's financial plan represents a stage in a larger planning process.

Question 79

A business plan is a picture or model of what management expects a business to become in the future expressed in words and numbers. The numbers are mainly financial projections.

Question 80

A strategic plan is broad and conceptual rather than detailed and numerical. It does, however, contain precise financial projections supported by a great deal of detail.