Deck 3: Financial Forecasting

Question 1

Please refer to Oscar's financial statements.Assume a constant debt-equity ratio,net profit margin and dividend payout ratio,and further assume all of Oscar's costs,assets and current liabilities vary directly with sales.What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent?

A) $10,857.50
B) $10,931.38
C) $11,663.75
D) $15,587.50
E) $18,987.50
F) None of the above.

Answer 1

$11,663.75

Question 2

Edna's Laundry Services just completed pro forma statements using the percentage of sales approach.The pro forma shows a projected external financing need of -$5,500.Interpret this figure.What are the firm's options in this case?

Answer 2

A negative value implies that the company has excess cash above its desired minimum.With a negative external financing need,the firm has a surplus of funds that it can use to reduce current liabilities,reduce long-term debt,buy back common stock,or increase dividends.If acceptable opportunities exist,the firm might also use the extra funds to purchase fixed assets,thereby increasing its potential growth,should that action be warranted.

Question 3

Please refer to Oscar's financial statements.What was the increase in retained earnings of Oscar's during 2012?

A) $450
B) $1,380
C) $1,830
D) $2,280
E) None of the above.

Answer 3

$1,380

Question 4

To estimate Missed Places,Inc.'s (MP)external financing needs,the CFO needs to figure out how much equity her firm will have at the end of next year.At the end of the most recent fiscal year,MP's retained earnings were $158,000.The Controller has estimated that over the next year,gross profits will be $360,700,earnings after tax will total $23,400,and MP will pay $12,400 in dividends.What are the estimated retained earnings at the end of next year?

A) $169,000
B) $170,400
C) $181,400
D) $506,300
E) $518,700
F) None of the above.

Question 5

Pro forma financial statements,by definition,are predictions of a company's financial statements at a future point in time.So,why is it important to analyze the historical performance of the company before constructing pro forma financial statements?

Question 6

The most common approach to developing proforma financial statements is called the:

A) cash budget method.
B) financial planning method.
C) seasonality approach.
D) percent-of-sales method.
E) market-oriented approach.
F) None of the above.

Question 7

Please refer to Oscar's financial statements.Assume a constant net profit margin and dividend payout ratio,and further assume all of Oscar's assets and current liabilities vary directly with sales.Assume long-term debt and common stock remain unchanged.Sales are projected to increase by 10 percent.What is the external financing need for next year?

A) -$410
B) -$260
C) $235
D) $1,320
E) $7,240
F) None of the above.

Question 8

Please refer to Oscar's financial statements.Sales are projected to increase by 3 percent next year.The profit margin and the dividend payout ratio are projected to remain constant.What is the projected addition to retained earnings for next year?

A) $1,309.19
B) $1,421.40
C) $1,884.90
D) $2,667.78
E) $3,001.40
F) None of the above.

Question 9

You are developing a financial plan for a corporation.Which of the following questions will be considered as you develop this plan?
I.How much will our sales grow?
II.Will additional fixed assets be required?
III.Will dividends be paid to shareholders?
IV.How much new debt must be obtained?

A) I and IV only
B) II and III only
C) I, III, and IV only
D) II, III, and IV only
E) I, II, III, and IV

Question 10

You are estimating your company's external financing needs for the next year.At the end of the year you expect that owners' equity will be $80 million,total assets will amount to $170 million,and total liabilities will be $70 million.How much will your firm need to borrow,or otherwise acquire,from outside sources during the year?

A) $20 million
B) $70 million
C) $150 million
D) $160 million
E) $180 million
F) None of the above.

Question 11

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections?
I.Simulation
II.Ad hoc adjustments
III.Scenario analysis
IV.Sensitivity analysis

A) II and IV only
B) III and IV only
C) II, III, and IV only
D) I, II, and III only
E) I, III, and IV only
F) I, II, III, and IV

Question 12

Assume each month has 30 days and AmDocs has a 60-day accounts receivable period.During the second calendar quarter of the year (April,May and June),AmDocs will collect payment for the sales it made during which of the months listed below?

A) October, November, and December
B) November, December, and January
C) December, January, and February
D) January, February, and March
E) February, March, and April

Question 13

Which one of the following statements is correct concerning the cash balance of a firm?

A) Most firms attempt to maintain a zero cash balance at all times.
B) The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance.
C) Most firms attempt to maximize the cash balance at all times.
D) A cumulative cash deficit indicates a borrowing need.
E) The ending cash balance must equal the minimum desired cash balance.

Question 14

Financial planning:

A) focuses solely on the short-term outlook for a firm.
B) is a process that firms employ only when major changes to a firm's operations are anticipated.
C) is a process that firms undergo once every five years.
D) considers multiple options and scenarios for the next two to five years.
E) provides minimal benefits for firms that are highly responsive to economic changes.

Question 15

Preston Fencing Company's sales,half of which are for cash and the other half sold on credit,over the past three months were:
a.Estimate Preston's cash receipts in October if the company's collection period is 30 days.
b.Estimate Preston's cash receipts in October if the company's collection period is 45 days.
c.What would be the October balance of accounts receivable for Preston Fencing if the company's collection period is 30 days?
45 days?

Question 16

Ruff Wear expects sales of $560,$650,$670,and $610 for the months of May through August,respectively.The firm collects 20 percent of sales in the month of sale,70 percent in the month following the month of sale,and 8 percent in the second month following the month of sale.The remaining 2 percent of sales is never collected.How much money does the firm expect to collect in the month of August?

A) $621
B) $628
C) $633
D) $639
E) $643 August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643

Question 17

On May 1,Vaya Corp.had a beginning cash balance of $175.Vaya's sales for April were $430 and May sales were $480.During May,the firm had cash expenses of $110 and made payments on accounts payable of $290.Vaya's accounts receivable period is 30 days.What is the firm's beginning cash balance on June 1?

A) $145
B) $155
C) $205
D) $215
E) $265 Cash balance = $175 - $110 - $290 + $430 = $205

Question 18

The Limited collects 25 percent of sales in the month of sale,60 percent of sales in the month following the month of sale,and 15 percent of sales in the second month following the month of sale.During the month of April,the firm will collect:

A) 60 percent of February sales.
B) 15 percent of April sales.
C) 60 percent of March sales.
D) 15 percent of March sales.
E) 25 percent of February sales.

Question 19

Please refer to Oscar's financial statements.All of Oscar's costs and net working capital vary directly with sales.Sales are projected to increase by 10 percent.What is the pro forma accounts receivable balance for next year?

A) $949
B) $1,034
C) $1,113
D) $1,730
E) $2,670
F) None of the above.

Question 20

Steve has estimated the cash inflows and outflows for his sporting goods store for next year.The report that he has prepared summarizing these cash flows is called a:

A) pro forma income statement.
B) sales projection.
C) cash budget.
D) receivables analysis.
E) credit analysis.
F) None of the above.

Question 21

Suppose your colleague constructed a pro forma balance sheet and a cash budget for your company for the same time period,and the external financing required from the pro forma forecast exceeded the cash deficit estimated on the cash budget.How would you interpret this result?