Deck 16: Financial Planning and Control

Question 1

At the financial control phase, a firm is concerned with:

A) the amount of funds generated internally.
B) determining how much money it will need during a given period.
C) determining its financial breakeven point.
D) the degree of financial leverage that is acceptable.
E) implementing financial plans and dealing with feedback.

Answer 1

E

Question 2

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

Answer 2

False

Question 3

Lumpy assets do not have an impact on the financial requirements associated with the expansion of the firm.

Answer 3

False

Question 4

Which of the following is most likely to increase spontaneously with an increase in sales?

A) Notes payable
B) Long-term bonds
C) Preferred stock
D) Common stock
E) Accounts payable

Question 5

Which of the following is the most important ingredient of the financial planning process of a firm?

A) Expense forecast
B) External financing forecast
C) Sales forecast
D) Internal fund generation forecast
E) Capital requirements forecast

Question 6

If a firm does not meet its forecasted sales level, leverage will result in a magnified loss in income compared to what is expected. This will occur because production facilities might not be expanded appropriately.

Question 7

Better management of inventory results in a more frequent turnover of products.

Question 8

Which of the following figures is considered to forecast the sales of a firm?

A) Sales during the past five to 10 years
B) Sales of competitors
C) Average sales of the industry
D) Additional funds needed to increase sales
E) Sales financed through internal equity

Question 9

Which of the following is the first step involved in constructing pro forma financial statements?

A) Forecasting the next period's balance sheet
B) Determining the additional funds needed (AFN) to support expected growth
C) Forecasting the income statement
D) Implementing the financing feedbacks
E) Determining the operating breakeven point

Question 10

Any deviation from projections must be dealt with to improve future forecasts.

Question 11

Managements need not consider economies of scale in operations when constructing pro forma financial statements since economies of scale do not impact financial statements.

Question 12

Which of the following statements is true of financial forecasts in the financial planning process?

A) The forecast of money the firm needs is estimated by adding the increases in assets and spontaneous liabilities and subtracting the operating income.
B) The projected balance sheet method of forecasting financial needs requires only a forecast of the firm's balance sheet.
C) The projected balance sheet method forces recognition of the fact that new financing creates additional financial obligations.
D) The projected balance sheet method of forecasting financial needs does not consider dividends paid out to shareholders as these are after tax payments from retained earnings.
E) Financing feedback describes the effect on the firm's stock price of the announcement that the firm will sell new equity or debt to raise the needed capital on its stock price.

Question 13

Which of the following is an effect of an over optimistic sales forecast?

A) High inventory turnover ratios
B) High costs for depreciation
C) Low costs for storage
D) High rates of return on equity
E) Low levels of plant and equipment

Question 14

Lumpy assets are assets that cannot be acquired in small increments; they must be obtained in large, discrete amounts.

Question 15

Excess capacity means more external financing is required to support increases in operations than would be needed if a firm previously operated at full capacity.

Question 16

If a firm does not meet its forecasted sales level, leverage will result in a magnified increase in income compared to what is expected.

Question 17

Which of the following accounts remains the same even with an increase in sales?

A) Accounts payable
B) Notes payable
C) Accrued taxes
D) Accounts receivable
E) Accrued wages

Question 18

To determine the additional funds needed to support the level of forecasted operations, _____.

A) subtract the spontaneously generated funds from the sales forecast
B) subtract all the operating costs from the sales forecast
C) add the funds generated internally to the spontaneously generated funds
D) subtract the funds generated internally from the required funds
E) add the spontaneously generated funds to the retained earnings plus

Question 19

If the projected operating results are unsatisfactory, management can reformulate its plans and develop targets that are more reasonable for the coming year.

Question 20

A firm should scale back the projected level of operations if the funds required to meet the sales forecast are easily available.

Question 21

A firm utilizes 75 percent of its plant capacity to produce the current year's sales of $3,000 million. Which of the following is the full-capacity sales of the firm?

A) $2,000 million
B) $2,200 million
C) $3,000 million
D) $3,450 million
E) $4,000 million

Question 22

A firm needs external financing to support increases in operations if:

A) the firm is operating at full capacity.
B) the firm is accounting for a very less amount of financing feedbacks.
C) the firm has a large amount of spontaneously generated funds.
D) the firm is having economies of scale.
E) the firm is operating at the breakeven point.

Question 23

The process of determining whether the forecast meets the firm's financial targets is known as _____.

A) operating breakeven analysis
B) economies of scale
C) leverage analysis
D) financial statement analysis
E) strategic planning

Question 24

Projected statements must be analyzed to determine if they meet the targets by _____.

A) preparing financial ratios
B) preparing the statement of cash flows
C) determining economies of scale
D) calculating lumpy assets
E) preparing budgetary notes

Question 25

If a firm is operating at its full capacity, any increase in sales will require _____.

A) economies of scale
B) financing feedbacks
C) spontaneously generated funds
D) additional assets
E) financing adjustments

Question 26

Azure Inc. has sales of $4,500 million, and it uses only 80 percent of its plant capacity. It can increase its sales to _____ without having to increase its plant and equipment.

A) $2,530 million
B) $4,125 million
C) $5,625 million
D) $6,150 million
E) $7,035 million

Question 27

The method of forecasting financial requirements based on forecasted financial statements is known as the _____.

A) pro forma cash flow statements method
B) pro forma retained earnings method
C) forecasted income and expense method
D) projected operating cash flow method
E) projected balance sheet method

Question 28

Which of the following actions is taken to reduce the collections period for receivables of a firm?

A) Increasing the sales of the firm
B) Decreasing the purchases of the firm
C) Modifying the credit policy of the firm
D) Changing the inventory valuation method of the firm
E) Revising the working capital policy of the firm

Question 29

Considering each action independently and holding other things constant, which of the following reduces a firm's need for additional capital?

A) An increase in the dividend payout ratio
B) A decrease in the days sales outstanding
C) A decrease in the profit margin
D) An increase in expected sales growth
E) A decrease in the accrual accounts (accrued wages and taxes)

Question 30

Assume that a firm did not operate at full capacity in the current year. The firm should increase its plant and equipment only if:

A) its variable cost of goods sold ratio changes in the next year with an increase in operations.
B) the additional sales forecasted in the next year exceed the unused capacity of the existing assets.
C) the internally generated funds are in surplus to support the forecasted increase in sales.
D) the addition of fixed assets in large, discrete units results in economies of scale.
E) fixed operating costs are not recovered by the revenue from each unit sold by the firm.

Question 31

Additional funds needed (AFN) will be negative if:

A) assets that can be acquired only in large, discrete amounts are acquired.
B) the plant and equipment of the firm is increased to achieve additional growth.
C) the amount of internal financing expected is decreased because of an increase in operations of the firm.
D) there are economies of scale in the use of many types of assets.
E) the amount of internally generated funds is more than sufficient to support the forecasted increase in sales.

Question 32

What is the equation to determine the estimated additional funds needed (AFN)?

A) Estimated AFN = Forecasted increase in assets + Forecasted increase in liabilities + Forecasted increase in retained earnings
B) Estimated AFN = Forecasted increase in assets - Financing feedbacks + forecasted increase in retained earnings
C) Estimated AFN = Forecasted increase in assets - Financing feedbacks - spontaneously generated funds
D) Estimated AFN = forecasted increase in liabilities + Financing feedbacks + spontaneously generated funds
E) Estimated AFN = Forecasted increase in assets - Forecasted increase in liabilities - forecasted increase in retained earnings

Question 33

What is the formula for calculating the full-capacity sales of a firm?

A) Full-capacity sales = Existing sales level ÷ Percent of capacity used to generate existing sales level
B) Full-capacity sales = Future sales level ÷ (1 - Percent of capacity used to generate future sales level)
C) Full-capacity sales = Existing sales level ÷ Percent of capacity used to generate future sales level
D) Full-capacity sales = Future sales level ÷ (1 + Percent of capacity used to generate existing level of assets)
E) Full-capacity sales = Existing sales level ÷ (1 - Percent of capacity used to generate future level of assets)

Question 34

To fully account for financing feedbacks, all steps in the projected balance sheet method should be repeated until _____.

A) the financing feedbacks equal zero
B) the spontaneously generated funds equal one
C) the additional funds needed equal zero
D) the degree of financial leverage equals one
E) the revenue equals the expenses

Question 35

Which of the following is the objective of preparing the income statement for the coming year?

A) To determine the current liabilities that change naturally with changes in sales
B) To determine funds that a firm must raise externally through new borrowing or by selling new stock
C) To determine the value of stock in the coming year
D) To determine the amount of retained earnings the company expects to generate during the year
E) To determine the total of cash flows from various activities during the year

Question 36

Funds that are obtained from routine business transactions are known as _____.

A) spontaneously generated funds
B) additional funds needed
C) cash flows from financing activities
D) internally financed funds
E) financial feedback funds

Question 37

Following is the balance sheet of Cyan Inc.:
Fixed and current assets are fully utilized, and the sales/assets and sales/spontaneous liabilities ratios remain constant. Next year, the firm expects sales to increase by 50 percent. It also expects to retain $2,000 of next year's earnings within the firm. What is the next year's additional external funding requirement, or additional funds needed (AFN)?

A) No additional funds are required.
B) $3,500
C) $4,500
D) $5,500
E) $6,500

Question 38

Which of the following accurately describes financing feedbacks?

A) Funds that a firm must raise externally through new borrowing or by selling new stock.
B) A method of forecasting financial requirements based on forecasted financial statements.
C) A forecast of a firm's unit and dollar sales generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, and so forth.
D) The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets.
E) The projection of sales, income, and assets, as well as the determination of the resources needed to achieve these projections.

Question 39

One of the assumptions made in forecasting financial requirements based on the forecasted income statement is that:

A) costs in the next year will remain the same as the previous year.
B) costs will increase at the same rate as sales.
C) costs in the next year will be an average of the costs of the three previous years.
D) costs will move in the opposite direction of sales.
E) costs will be according to the industry standards.

Question 40

Compuvac Company has just completed its first- year forecast using the projected balance sheet method. The firm has determined that it needs $4 million in new debt that can be sold at par with a 10% annual coupon. Additionally, the firm will sell 500,000 shares of new common equity at $18.10 per share. Next year's expected dividend is $0.48 per share. The firm expects that taxes will be $160,000 lesser under the second year than they were under the first pass based on a 40% tax rate. Given this information, what is the incremental change in additional funds needed (AFN) for Compuvac from the first year to the second pass?

A) $0
B) $160,000
C) $240,000
D) $320,000
E) $480,000

Question 41

Operating breakeven analysis deals with:

A) the assets and liabilities recorded in the pro forma balance sheet.
B) the net cash flows from operating activities recorded in the statement of cash flows.
C) the noncash items included in operating activities.
D) the revenues and expenses associated with a firm's normal production and selling operations.
E) the interest payments to bondholders and the dividend payments to preferred stockholders.

Question 42

By definition, a firm's operating breakeven point represents the level of production and sales at which:

A) additional funds needed equal zero.
B) variable costs equal operating revenue.
C) fixed variable costs equal operating revenue.
D) net operating income equals zero.
E) the cost of equity equals the cost of debt.

Question 43

By definition, a firm's financial breakeven point represents the level of net operating income (NOI) at which its:

A) stock value is maximized.
B) earnings before interest and taxes (EBIT) is equal to zero.
C) earnings per share (EPS) is equal to zero.
D) tax paid is equal to zero.
E) interest expense is equal to zero.

Question 44

Assets that cannot be acquired in small increments, but instead must be obtained in large, discrete units, are referred to as _____.

A) current assets
B) lumpy assets
C) spontaneously generated assets
D) excess capacity assets
E) long-term assets

Question 45

Everything else equal, a firm can reduce its operating breakeven point by:

A) increasing its fixed costs.
B) decreasing the selling price of the product that is sold.
C) increasing the contribution margin.
D) increasing the variable cost per unit.
E) decreasing the earnings per share.

Question 46

Financial leverage occurs because of the existence of fixed financial costs such as _____.

A) insurance expenses
B) preferred dividends
C) common stock dividends
D) depreciation
E) rent

Question 47

Which of the following is true of the degree of operating leverage (DOL)?

A) The higher the DOL, the closer the firm is to its financial breakeven point.
B) The higher the DOL, the lower the financial risk of the firm.
C) The lower the DOL, the higher the operating risk of the firm.
D) The higher the DOL, the closer the firm is to its operating breakeven point.
E) The higher the DOL, the higher the percentage increase in the sales.

Question 48

When there are economies of scale, a firm's _____ is likely to change as the size of the firm changes.

A) days sales outstanding ratio
B) total assets turnover ratio
C) variable cost of goods sold ratio
D) times interest earned ratio
E) return on assets ratio

Question 49

If a firm has a degree of operating leverage (DOL) that is greater than 1.0, then it means that a 1.0 percent change in _____ will cause a change in earnings before interest and taxes (EBIT) that is _____ 1.0 percent.

A) earnings per share; greater than
B) net income; greater than
C) net operating income; less than
D) sales; greater than
E) fixed costs; less than

Question 50

The relationship between sales volume and operating profitability is explored in _____.

A) cost-volume-profit planning
B) financial breakeven analysis
C) the projected balance sheet method
D) the degree of financial leverage
E) economies of scale

Question 51

Expert Analysts Resources (EAR) has provided you with the following information about three companies you are currently evaluating:
Company Degree of Operating Leverage (DOL) Degree of Financial Leverage (DFL)
Acme 1.5× 6.0×
Apex 3.0× 4.0×
Alps 5.0× 2.0×
_____ would be considered riskiest because _____.

A) Acme; its DFL equals 6.0, which is the highest leverage associated with any of the three firms
B) Acme; its degree of total leverage (DTL) is almost equal to 10×
C) Apex; it has the highest degree of total leverage (DTL) among the three firms
D) Alps; it has the highest DOL among the three firms
E) Acme; it has the lowest DOL among the three firms

Question 52

A firm must pay _____ costs even if it produces and sells nothing.

A) variable
B) lumpy
C) direct labor
D) fixed
E) breakeven

Question 53

The financial breakeven point is the level of _____ at which earnings per share (EPS) is equal to zero.

A) net operating income (NOI)
B) retained earnings
C) degree of financial leverage (DFL)
D) net income
E) gross profit

Question 54

Marcus Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its variable costs are approximately 30% of sales, and its fixed operating costs amount to 50% of revenues at its current output level. Although fixed costs are based on revenues at the current output level, the cost level is fixed. Which of the following is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?

A) 1.0×
B) 2.2×
C) 3.5×
D) 4.0×
E) 5.0×

Question 55

A firm projects a small increase in sales, but still requires a significant increase in plant and equipment. Which of the following is a reason for such a large financial commitment?

A) Decrease in economies of scale
B) Increase in fixed operating costs
C) Decrease in financing feedbacks
D) Increase in lumpy assets
E) Decrease in spontaneously generated funds

Question 56

Which of the following statements is true of operating breakeven analysis?

A) It involves determining the level of production and sales at which net operating income is equal to one.
B) It involves determining the point at which revenue from sales equals operating costs.
C) It involves the analysis of the level of production and sales at which financing costs are recovered.
D) It involves determining the operating income the firm needs to just cover all of its financing costs.
E) It involves the analysis of the interest payments to bondholders and the dividend payments to preferred stockholders.

Question 57

Trident Food Corporation generated the following income statement for the most recent fiscal year: $$\begin{array} { l c } \text { Sales revenues } & \$ 150,000 \\\text { Variable cost of sales } & \frac { ( 112,500 ) } { 37,500 } \\\text { Gross profit } & \frac { ( 24,000 ) } { 13,500 } \\\text { Fixed operating costs } & \frac { ( 10,000 ) } { 3,500 } \\\text { Net operating income (EBIT) } & \underline { ( 1,400 ) } \\\text { Interest } & \frac { 2,100 } { \text { Earnings before taxes } }\end{array}$$
What is the degree of operating leverage for Trident Food?

A) 2.78×
B) 10.71×
C) 3.86×
D) 3.00×
E) 4.00×

Question 58

Financial breakeven analysis determines the operating income at which the _____ is equal to zero.

A) earnings before interest and tax (EBIT)
B) degree of operating leverage
C) earnings per share
D) degree of financial leverage (DFL)
E) gross profit

Question 59

Operating breakeven analysis determines:

A) the minimum value of assets that a firm should hold to achieve profitability.
B) the maximum amount of the total assets to be financed by debt.
C) the minimum earnings to be retained and the earnings to be paid as dividends.
D) the level of capacity utilization required to achieve the forecasted sales level.
E) the level of sales of a new product required to achieve profitability.

Question 60

Which of the following mathematical expressions is true if the net operating income of a firm is equal to zero?

A) Sales = Gross profit margin
B) Sales = Total variable costs + Total fixed costs
C) Total operating costs = Total variable costs + Total fixed costs
D) Total operating costs = Contribution margin
E) Contribution margin = Earnings before interest and tax

Question 61

If a firm does not meet its forecasted sales level, then leverage will result in a magnified loss in income compared to what is expected because:

A) retained earnings will increase rapidly.
B) inventories will be built very slowly.
C) production facilities will be expanded greatly.
D) additional external funds needed will be reduced.
E) sales operations will be reduced drastically.

Question 62

According to the forecasting and control function, if a firm cannot obtain the funds required to meet the sales forecast, then it should _____.

A) plan for the acquisition of required funds well in advance
B) scale back the projected level of operations
C) expand its production facilities
D) build up its inventory quickly
E) reformulate its plans to increase retained earnings

Question 63

The degree of financial leverage (DFL) is defined as the percentage change in _____ that results from a given percentage change in earnings before interest and tax (EBIT).

A) sales
B) net operating income (NOI)
C) operating fixed costs
D) net income
E) earnings per share (EPS)

Question 64

The percentage change in earnings before interest and tax (EBIT) associated with a given percentage change in sales is known as the _____.

A) degree of financial leverage
B) degree of total leverage
C) degree of operating leverage
D) degree of combined leverage
E) degree of contribution margin leverage

Question 65

Which of the following leverages considers the effect on earnings per share (EPS) of the changing operating income (EBIT)?

A) Operating leverage
B) Total leverage
C) Combined leverage
D) Contribution leverage
E) Financial leverage

Question 66

Which of the following statements is true of the financial breakeven point?

A) It determines the impact of a firm's financing mix on its earnings per share.
B) It determines the level of sales of a new product required for the firm to achieve profitability.
C) It determines the effects of a general expansion in the level of a firm's operations.
D) It analyzes the consequences of purchasing modernization projects where the fixed investment in equipment is increased.
E) It represents the level of production and sales at which net operating income is zero.

Question 67

Which of the following mathematical expressions is used to compute the degree of financial leverage at a particular level of earnings before interest and tax (EBIT)? Assume that the preferred stockholders receive no dividends.

A) Earnings before interest and tax ÷ Earnings per share (EPS)
B) Gross profit ÷ Earnings before interest and tax
C) Sales ÷ (Earnings before interest and tax - Interest)
D) Earnings before interest and tax ÷ (Earnings before interest and tax - Interest)
E) (Earnings before interest and tax - Interest - Taxes) ÷ Number of shares

Question 68

Trident Food Corporation generated the following income statement for the most recent fiscal year: Sales revenues $150,000
Variable cost of sales (112,500)
Gross profit 37,500
Fixed operating costs (24,000)
Net operating income (EBIT) 13,500
Interest (10,000)
Earnings before taxes 3,500
Taxes (40%) (1,400)
Net income 2,100
Which of the following is the degree of total leverage for Trident Foods?

A) 42.86×
B) 10.71×
C) 71.43×
D) 17.86×
E) 6.43×

Question 69

If the forecasted sales level is not met, which of the following will lead to a lower than expected addition to retained earnings?

A) A decrease in production facilities
B) An increase in fixed charges on external financing
C) Assets being turned over quickly
D) A significant increase in income
E) Inventories being built up quickly

Question 70

Which of the following is true of the degree of total leverage (DTL)?

A) It is the percentage change in EPS that results from a given percentage change in EBIT.
B) It is the level of EBIT at which EPS equals zero.
C) It is the percentage change in NOI (or EBIT) associated with a given percentage change in sales.
D) It represents the level of production and sales at which net operating income is zero.
E) It is the percentage change in EPS that results from a 1 percent change in sales.