Deck 18: Financial Modelling and Pro Forma Analysis

Question 1

Using the percent of sales method,and assuming 20% growth in sales,estimate Billy's Burgers' accounts payable for 2016.

A) $21.0 million
B) $25.2 million
C) $18.0 million
D) $21.6 million
E) $19.5 million

Answer 1

$21.6 million

Question 2

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 2016.

A) $23.28 million
B) $35.76 million
C) $24.84 million
D) $38.16 million
E) $32.35 million

Answer 2

$38.16 million

Question 3

Stanley Corp.has current sales of $50 million,cost of sales of $40 million and forecasts that next year's sales will grow to $60 million.Using the percent of sales method,compute the forecast for next year's cost of sales.

A) $48 million
B) $40 million
C) $50 million
D) $60 million
E) $44 million

Answer 3

$48 million

Question 4

Using the percent of sales method,and assuming 20% growth in sales,estimate Billy's Burgers' accounts receivable for 2016.

A) $21.0 million
B) $25.2 million
C) $18.0 million
D) $21.6 million
E) $19.5 million

Question 5

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

A) increasing the spread
B) identifying linkages
C) decreasing the spread
D) identifying wastage
E) identifying differences

Question 6

Calgary Doughnuts had sales of $100 million in 2015.Its cost of sales were $70 million.If sales are expected to grow at 20% in 2016,compute the forecasted costs using the percent of sales method.

A) $80 million
B) $84 million
C) $88 million
D) $96 million
E) $102 million

Question 7

Net new financing that we need to equate the assets and liabilities is also called the "plug."

Question 8

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 2016.

A) $23.28 million
B) $35.76 million
C) $24.84 million
D) $28.16 million
E) $30.29 million

Question 9

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
E) large cash reserves

Question 10

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
E) percent of earnings

Question 11

Using the percent of sales method,and assuming 20% growth in sales,estimate Billy's Burgers' depreciation for 2016.

A) $17.2 million
B) $50.8 million
C) $12.0 million
D) $20.6 million
E) $14.3 million

Question 12

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
E) accounts receivable, accounts payable

Question 13

________ 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
E) Net debt

Question 14

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
E) V only

Question 15

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

Question 16

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
E) income tax

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

Calgary Doughnuts had sales of $300 million in 2015.Its cost of sales were $200 million.If sales are expected to grow at 15% in 2016,compute the forecasted costs using the percent of sales method.

A) $210 million
B) $215 million
C) $225 million
D) $230 million
E) $245 million

Question 19

Calgary Doughnuts had sales of $200 million in 2015.Its cost of sales were $160 million.If sales are expected to grow at 10% in 2016,compute the forecasted costs using the percent of sales method.

A) $160 million
B) $170 million
C) $173 million
D) $176 million
E) $180 million

Question 20

Using the percent of sales method,and assuming 20% growth in sales,estimate Billy's Burgers' inventory for 2016.

A) $19.2 million
B) $21.6 million
C) $24.2 million
D) $25.2 million
E) $27.6 million

Question 21

Granger Inc.has done a long-term forecast of its balance sheet.Total assets are projected to be $1.5 million and current liabilities are projected to be $750,000.If the firm expects to need $500,000 in net new financing,what are the projected long-term liabilities?

A) $650,000
B) $1,250,000
C) $350,000
D) $450,000
E) $250,000

Question 22

Granger Inc.has done a long-term forecast of its balance sheet.The current liabilities are projected to be $25 million and other long-term liabilities are $10 million.If the firm expects to need $8 million in net new financing,what are the projected total assets?

A) $43 million
B) $23 million
C) $27 million
D) $7 million
E) $35 million

Question 23

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
E) $27 million

Question 24

A services firm does all its business in cash only.The firm projects a cash balance of of $4000 in its account after all taxes and costs are paid.The owners plan to invest $7000 and pay a dividend of $1000.How much net new financing is needed?

A) $4000
B) $5000
C) $6000
D) $7000
E) $8000

Question 25

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 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
E) $10 million

Question 27

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

Question 28

What is common starting point for forecasting?

Question 29

What is net new financing?

Question 30

What is the plug?

Question 31

Granger Inc.has done a long-term forecast of its balance sheet.Total assets are projected to be $800,000 and other long-term liabilities are $300,000.If the firm expects to need $150,000 in net new financing,what are the projected current liabilities?

A) $650,000
B) $150,000
C) $350,000
D) $450,000
E) $250,000

Question 32

A services firm does all its business in cash only.The firm projects a cash balance of of $3000 in its account after all taxes and costs are paid.The owners plan to invest $8000 and pay a dividend of $1000.How much net new financing is needed?

A) $4000
B) $5000
C) $6000
D) $7000
E) $8000

Question 33

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 much net new financing is needed in the following year?

A) $58 million
B) $60 million
C) $65 million
D) $70 million
E) $75 million

Question 34

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
E) inventories

Question 35

Granger Inc.has done the following projections for its balance sheet: total assets of $85 million,current liabilities of $29 million,long-term liabilities of $43 million.If the firm will require net new financing of $1 million,what is the projected amount of stockholders' equity?

A) $14 million
B) $13 million
C) $10 million
D) $12 million
E) $17 million

Question 36

Granger Inc.has done the following projections for its balance sheet: total assets of $15 million,current liabilities of $3 million,long-term liabilities of $8 million,and stockholders' equity of $2 million.How much net new financing is needed in the following year?

A) $4 million
B) $2 million
C) $6 million
D) $0
E) $1 million

Question 37

A services firm does all its business in cash only.The firm projects a cash balance of of $2000 in its account after all taxes and costs are paid.The owners plan to invest $5000 and pay a dividend of $1000.How much net new financing is needed?

A) $4000
B) $5000
C) $6000
D) $7000
E) $8000

Question 38

What is the implied assumption in percent of sales method?

Question 39

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
E) debt, current ratio

Question 40

How do we compute net new financing?

Question 41

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

The amount of net working capital for Ideko in 2017 is closest to:

A) $35,195
B) $26,420
C) $22,170
D) $30,510
E) $21,260

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 2016?

A) 1505 units
B) 1323 units
C) 1914 units
D) 1115 units
E) 1702 units

Question 43

Kendo Corp.is projecting sales of $15 million in the coming year.If the size of the market is $50 million,and Kendo's projected market share is 25%,what is the average sale price of its products?

A) $0.60
B) $0.83
C) $1.00
D) $1.20
E) $1.85

Question 44

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2016 is closest to:

A) $14,525
B) $19,690
C) $22,710
D) $16,970
E) $24,560

Question 45

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

The amount of the increase in net working capital for Ideko in 2016 is closest to:

A) $4090
B) $4685
C) $3665
D) $5230
E) $5790

Question 46

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

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

Question 47

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

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 48

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

The amount of net working capital for Ideko in 2016 is closest to:

Question 49

What is the major shortcoming of the percent of sales method for firms experiencing rapid growth?

Question 50

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
E) $66 million

Question 51

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

Question 52

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
E) $44 million

Question 53

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

The amount of the increase in net working capital for Ideko in 2017 is closest to:

A) $4685
B) $3665
C) $4090
D) $5230
E) $5750

Question 54

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 2018?

A) 1505 units
B) 1115 units
C) 1323 units
D) 1702 units
E) 1914 units

Question 55

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
E) $50 million

Question 56

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2016 is closest to:

A) $14,525
B) $16,970
C) $22,710
D) $19,690
E) $23,548

Question 57

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 2017?

A) 1702 units
B) 1323 units
C) 1505 units
D) 1914 units
E) 1115 units

Question 58

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

The amount of net working capital for Ideko in 2015 is closest to:

A) $22,750
B) $35,195
C) $30,510
D) $26,420
E) $29,330

Question 59

Kendo Corp.is projecting sales of $14 million in the coming year.If the size of the market is $120 million,and Kendo sells its products for an average sale price of $36.25,what is Kendo's projected market share?

A) 5%
B) 2%
C) 16%
D) 23%
E) 54%

Question 60

What is minimum required cash?

Question 61

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%
E) 10%

Question 62

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%
E) 15.7%

Question 63

A firm has $20 million in equity and $10 million in debt.The firm forecasts that this year's net income will be $2.5 million.It currently pays dividends equal to 30% of its net income.If the firm decides to change its payout policy to 40% of net income,how would this change its internal growth rate?

A) Decreases by 0.83%
B) Decreases by 1%
C) No change
D) Increases by 0.83%
E) Increases by 1%

Question 64

Compute the after-tax interest expense for a firm with Interest on Excess Cash = $1000,Interest on Debt = $5000,and a tax rate of 30%.

A) $2500
B) $2800
C) $3100
D) $3300
E) $3500

Question 65

________ 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
E) Asset expansion rate

Question 66

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%
E) 13%

Question 67

A firm has ROA of 30%,ROE of 40%,and a payout ratio of 10%.What is the firm's sustainable growth rate?

A) 12%
B) 3%
C) 4%
D) 27%
E) 36%

Question 68

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

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

Question 69

A firm has ROA of 18%,ROE of 25%,and a retention rate of 60%.What is the firm's sustainable growth rate?

A) 40%
B) 7.2%
C) 10%
D) 15%
E) 10.8%

Question 70

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

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

Question 71

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.
E) The firm will need to cut back on its planned investments.

Question 72

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.
E) The firm will not be able to maintain its debt-to-equity ratio.

Question 73

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2014-2019

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

Question 74

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%
E) 22%

Question 75

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

Question 76

A firm has ROA of 20%,ROE of 25%,and a payout ratio of 30%.What is the firm's internal growth rate?

A) 5%
B) 14%
C) 17.5%
D) 6%
E) 7.5%

Question 77

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%
E) 11%

Question 78

A firm has ROA of 12%,ROE of 20%,and a retention rate of 40%.What is the firm's internal growth rate?

A) 20%
B) 12%
C) 4.8%
D) 8%
E) 7.2%

Question 79

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%
E) 16%

Question 80

A firm has $50 million in equity and $20 million in debt,has net income of $10 million and an internal growth rate of 6%.What is the firm's payout ratio?

A) 58%
B) 42%
C) 18%
D) 82%
E) 20%