Deck 6: Projecting Financial Requirements and Managing Growth

Question 1

Past relationships among variables on the balance sheet and income statement are typically POOR predictors of the future.

Answer 1

False

Question 2

It is common to use the change in long-term debt as a "plug" figure in the construction of a pro forma balance sheet.However,if the firm does not have long-term debt,which of the following could substitute as the final plug figure?

A)changes in short-term debt
B)changes in new equity
C)changes in the cash balance
D)All of the above

Answer 2

D

Question 3

Jensen Inc.has net earnings of $24,000,000 this year and a dividend payout policy of 40% of earnings.If the firm follows its regular payout policy what will be the addition to retained earnings this year?

A)$9,600,000
B)$12,000,000
C)$14,400,000
D)$16,000,000

Answer 3

C

Question 4

Which of the following choices would NOT be found on a pro forma balance sheet?

A)forecasted sales
B)total liabilities
C)fixed assets
D)current assets

Question 5

In constructing a pro forma balance sheet,which of the following fills the role of being the "plug" figure to balance the balance sheet?

A)external financing
B)the change in retained earnings
C)accounts payable
D)accounts receivable

Question 6

In chapter 6,Projecting Financial Requirements and Managing Growth,the author focuses on three critical questions to examine the firm's financial future.Which of the following questions is NOT addressed by the author in this chapter?

A)How much and what type of financing will be required to meet goals and expectations?
B)How do we compensate mangers to attract and keep good executives?
C)How profitable do we expect the firm to be in the coming years?
D)What is the RIGHT amount of sales growth (as opposed to too little or too much)?

Question 7

Managers often begin with an estimate of ________ when beginning to develop pro forma financial statements.

A)net income
B)sales
C)assets
D)equity

Question 8

Cantanna Inc.,is developing a pro forma income statement for the coming year.The chief financial officer estimates that fixed assets are $70,000,000 and that sales will be $300,000,000.If depreciation is historically 20% of fixed assets,what is the expected amount of depreciation for the upcoming year (in dollars)?

A)$14,000,000
B)$20,000,000
C)$60,000,000
D)This figure cannot be reasonably estimated.

Question 9

Dunweiler Inc.,is developing a pro forma income statement for the coming year.The chief financial officer estimates that sales will be $150,000,000.If gross profits are historically 36% of sales,what is the expected cost of goods sold (in dollars)?

A)$36,000,000
B)$54,000,000
C)$64,000,000
D)$96,000,000

Question 10

When developing a pro forma balance sheet which of the following is typically the LAST item to be estimated?

A)inventory
B)total assets
C)external financing
D)cash

Question 11

Which of the following is NOT a potential source of outside financing for a corporation?

A)new bank loans
B)new long-term debt
C)sale of new equity
D)additions to retained earnings

Question 12

When constructing a pro forma income statement,which of the following is likely to be calculated first among the items listed?

A)dividends
B)taxes
C)cost of goods sold
D)interest expense

Question 13

Dunweiler Inc.,is developing a pro forma income statement for the coming year.The chief financial officer estimates that sales will be $150,000,000.If selling,general,and administrative expenses (SGA)are historically 18% of sales,what are the expected SGA expenses (in dollars)?

A)$18,000,000
B)$27,000,000
C)$30,000,000
D)$41,000,000

Question 14

When constructing pro forma income statements which of the following is the last item to be estimated?

A)sales
B)the change in retained earnings
C)depreciation expense
D)taxes

Question 15

In constructing a pro forma balance sheet a manager can estimate the accounts receivable because:

A)managers typically construct a pro forma income statement prior to the balance sheet.Thus,an estimate of sales has already been made and this is critical to estimating accounts receivable.
B)if the firm has already made an estimate of expected sales,then it can also estimate average daily sales.
C)if the firm maintains similar credit standards it can use the current average age of accounts receivable to help estimate the anticipated average age of accounts receivable
D)if the firm has each piece of information as stated above THEN they can estimate accounts receivable for the pro forma balance sheet..

Question 16

Pro forma income statements are primarily based on forecasted sales and assumed relationships related to sales.

Question 17

Pro forma financial statements are an accountant's way of looking back to see what "might have been."

Question 18

Which of the following equations represents a simple and effective way to think about anticipated external funding?

A)External funds required = assets - liabilities - equity
B)External funds required = assets + liabilities - equity
C)External funds required = assets + liabilities + equity
D)External funds required = assets - liabilities + equity

Question 19

When constructing pro forma balance sheets,________ becomes the "plug" figure to make the balance sheet balance.

A)new fixed assets required
B)addition to retained earnings
C)cash
D)external funding required

Question 20

The ________ is the critical connection between the pro forma income statement and the pro forma balance sheet.

A)change in net working capital
B)change in cost of goods sold
C)change in dividends
D)change in retained earnings

Question 21

An alternative method of projecting a firm's future financial needs (such as bank loans )involves creation of a pro forma cash budget.Would you consider a cash budget to be more appropriate for short-term or long-term projections? Why? How do monthly cash budgets aid in the development of an annual cash budget? Is a cash budget more helpful for firms with seasonal needs or for those with constant cash flow needs?

Question 22

A pro forma balance sheet typically begins with liabilities and then we estimate the assets.

Question 23

Because key variables are often related rather than isolated we often change our estimates for selected variables simultaneously when examining pro forma statements.We call this type of activity:

A)ratio analysis.
B)scenario analysis.
C)sensitivity analysis.
D)form analysis.

Question 24

A pro forma balance sheet typically begins with the assets and then we estimate the liabilites and equity.

Question 25

A pro forma ________ forecasts the timing and amount of cash inflows and cash outflows.

A)income statement
B)balance sheet
C)cash budget
D)annual report

Question 26

Table 6.2

On-The-Level Manufacturing buys materials on credit at the start of the month and pays in 60 days.They also sell on credit,bill customers at the beginning of the month,and receive payment 30 days later.Using Table 6.2,what is the net cash flow from purchases and sales for the month of February?

A)$40,000
B)$45,000
C)-$45,000
D)There is NOT enough information to answer this question.

Question 27

A firm's ending equity equals the firms beginning equity plus any change in retained earnings.

Question 28

Which of the following is the primary source of cash inflows in a pro forma cash budget?

A)anticipated dividends
B)anticipated sales
C)anticipated equity
D)anticipated net earnings

Question 29

Which of the following choices would NOT be considered a cash outflow?

A)operational expenses
B)anticipated sales
C)selling,general,and administrative expenses
D)capital expenditures

Question 30

Table 6.2

On -The-Level Manufacturing buys materials on credit at the start of the month and pays in 60 days.They also sell on credit,bill customers at the beginning of the month,and receive payment 30 days later.Using Table 6.2,what is the net cash flow from purchases and sales for the month of March?

A)There is NOT enough information to answer this question.
B)$40,000
C)$45,000
D)-$45,000

Question 31

A cash budget is often more valuable as a LONG-term rather than a SHORT-TERM financial forecasting vehicle.

Question 32

When estimating a cash budget,which of the following items should the firm NOT include in the process?

A)dividends
B)taxes paid by the firm
C)wages
D)All of the above should be included

Question 33

A firm's pro forma balance sheet typically starts with liabilities and equity and THEN proceeds to assets

Question 34

When estimating a cash budget,which of the following items should the firm NOT include in the process?

A)taxes paid by creditors
B)commission payments paid to sales personnel
C)utility bills
D)fixed cash expenses

Question 35

Forecasted net cash flows are the difference between forecasted cash inflows and forecasted cash outflows.

Question 36

The generation of cash budgets and and pro forma financial statements are equivalent ways of forecasting financial needs.

Question 37

The process of determining the effects of one key variable on the overall outcome of a pro forma income statement,for example,is known as:

A)ratio analysis.
B)scenario analysis.
C)sensitivity analysis.
D)form analysis.

Question 38

Use the information provided to complete the pro forma income statement and balance sheet for J.W.Bracken Inc.

Question 39

A cash budget is often more valuable as a SHORT-term rather than a LONG-TERM financial forecasting vehicle.

Question 40

A firm's ending equity equals the firms beginning equity less any change in long-term debt.

Question 41

Other things equal,a higher leverage ratio implies:

A)a higher ROA.
B)lower financial risk for shareholders.
C)greater financial risk for shareholders.
D)a lower ROE.

Question 42

Which of the following would NOT be a direct concern of working capital sensitivity?

A)accounts receivable collection period
B)inventory turnover
C)annual tax obligations
D)average age of accounts payable

Question 43

Which of the following choices will lead to a DECREASE in loan requirements?

A)an increased age of accounts receivable
B)an increased age of accounts payable
C)a shortened age of inventory
D)Each of the above will lead to a decrease in loan requirements.

Question 44

Your firm's sales are estimated to increase by 10% in the next year.However,soon after the beginning of the year it becomes apparent that the growth in sales is more likely to be 20%.If your cost of good sold consists of only variable expenses,and the relationship between revenues and costs remain the same,which of the following situations would you expect to be true?

A)The percentage change in gross profit should be greater than the percentage change in sales.
B)The percentage change in gross profit should be less than the percentage change in sales.
C)The percentage change in gross profit should be zero because gross profit is not a function of sales if all CGS are variable.
D)The percentage change in gross profit should be the same as the percentage change in sales.

Question 45

Eagle Enterprises Inc.,has an asset turnover of 1.1,a financial leverage ratio of 1.67,a profit margin of 12% and a dividend payout ratio of 25%.What is the firm's sustainable growth rate?

A)29.39%
B)14.07%
C)5.51%
D)16.53%

Question 46

Gremlin Media Inc.has realized tremendous growth in recent years.Last year the firm realized an ROE of 41.16%.If the firm was in a 40% marginal tax bracket,had an asset turnover ratio of 2.1,a profit margin of 14%,and a leverage ratio of 2,what was the firm's retention ratio?

A)0.70
B)1.00
C)0.50
D)There is not enough information to answer this question.

Question 47

Gaston Grooming Inc.,has a sustainable growth rate of 17.28%.If the retention ratio is .60,the leverage ratio is 1.2 and the asset turnover ratio is 1.6,what was the firm's profit margin?

A)15.0%
B)13.6%
C)12.1%
D)11.4%

Question 48

Sensitivity analysis highlights the impact of a change in one key variable on another key variable.

Question 49

Craftsman Inc.,has a profit margin of 8%,an asset turnover ratio of 2.3,a leverage ratio of 1.50 and a retention ratio of .60.What is the firm's sustainable growth rate?

A)3.13%
B)8.70%
C)16.56%
D)46.00%

Question 50

Your firm's sales are estimated to increase by 10% in the next year.However,soon after the beginning of the year it becomes apparent that the growth in sales is more likely to be 20%.If your cost of good sold consists of both fixed and variable expenses,which of the following situations would you expect to be true?

A)The percentage change in gross profit should be greater than the percentage change in sales.
B)The percentage change in gross profit should be less than the percentage change in sales.
C)The percentage change in gross profit should be zero because gross profit is not a function of sales if some CGS are fixed.
D)The percentage change in gross profit should be the same as the percentage change in sales.

Question 51

Felton Financial Inc,had net earnings last year of $487,000.If the firm has a dividend payout policy of 30%,what was the addition to retained earnings?

A)$340,900
B)$487,000
C)$146,100
D)There is not enough information to answer this question.

Question 52

Your firm's sales are estimated to decrease by 10% in the next year.However,soon after the beginning of the year it becomes apparent that the reduction in sales is more likely to be 20%.If your cost of good sold consists of only fixed expenses,which of the following situations would you expect to be true?

A)The percentage negative change in gross profit should be greater than the percentage change in sales.
B)The percentage negative change in gross profit should be less than the percentage change in sales.
C)The percentage change in gross profit should be zero because gross profit is not a function of sales if all CGS are fixed.
D)The percentage change in gross profit should be the same as the percentage change in sales.

Question 53

As an initial assumption,it is reasonable to assume that firms are reluctant to do all of the following EXCEPT:

A)purchase new fixed assets.
B)issue new equity.
C)change dividend policy.
D)change debt policy.

Question 54

The ________ is the maximum a firm can grow with internally generated equity and new borrowing sufficient to maintain the current long-term-debt to equity ratio.

A)internal growth rate
B)sustainable growth rate
C)return on equity
D)return on assets

Question 55

Pro forma financial statements may be valuable for which of the following reasons?

A)To help us estimate how profitable a firm is expected to be
B)To help determine if and how much debt financing is required
C)To help banks determine if firms are likely to meet lending standards
D)All of the above

Question 56

Pro forma estimates of cash flows are rarely if ever correct.

Question 57

If a firm is trying to grow more rapidly,which of the following identifies a non-financially-related course of action?

A)increase the retention ratio
B)reduce dividends
C)increase asset turnover
D)increase the debt to equity ratio

Question 58

Dynamo Engines Inc.,has an ROA of 10%,a profit margin of 6%,an assets to equity ratio of 1.30,and a retention ratio of 0.70.What is the firm's sustainable growth rate?

A)18.57%
B)9.10%
C)5.46%
D)0.55%

Question 59

It is not unusual for a successful firm to temporarily grow more rapidly than its sustainable growth rate if the firm is in the ________ phase of business.

A)swan song
B)start-up
C)cash cow
D)middle

Question 60

"Unfortunately,one thing we know for certain about financial forecasts is that they are almost always wrong." If the preceeding statement is generally thought to be true,why do we spend so much time and money on financial forecasting?!

Question 61

Dynamo Engines Inc.,has an ROA of 10%,a profit margin of 6%,an assets to equity ratio of 1.30 and a retention ratio of 0.70.What is the firm's sustainable growth rate?

Question 62

Knowledge about the sustainable growth rate is important to all but one of the following groups or individuals.

A)The CEO
B)The CFO
C)Managers involved in a budgeting process
D)Knowledge about the sustainable growth rate is important to all of the above and others as well.

Question 63

Corporations tend to be MORE reluctant to increase dividends than to cut them.

Question 64

Firms paying excess dividends may cause shareholders to pay taxes sooner and at a higher marginal tax rate than if the firm either held the excess funds,or found additional satisfactory investments.

Question 65

A firm that grows too rapidly risks requiring too LITTLE financial leverage.

Question 66

A firm that is growing more slowly than its sustainable growth rate may generates excess cash.If the firm chooses to keep the excess cash which of the following is NOT true?

A)Holding on to excess cash may signal OVER utilization of assets.
B)Holding on to excess cash often is a negative stock signal in that investors interpret the excess cash is a result of no attractive investment alternatives.
C)Holding on to excess cash may attract unwanted potential investors who are attracted to the excess cash for their own purposes.
D)Holding on to excess cash may signal UNDER utilization of assets.

Question 67

If sales growth is SLOWER than the sustainable growth rate then the ROE is also lower.

Question 68

Consider the four components identified by the author in the sustainable growth equation.Which if nay of these components are heavily influenced by executive management?

Question 69

Which of following is NOT a variable in the equation for sustainable growth?

A)profit ratio
B)net working capital ratio
C)asset turnover ratio
D)leverage ratio

Question 70

The ________ is a two-edged sword in that as its value increases the ROE should increase,but the risk to shareholders also increases.

A)profit margin
B)ROA
C)leverage ratio
D)asset turnover ratio

Question 71

A firm that is growing more slowly than its sustainable growth rate may face which of the following scenarios if it generates excess cash rather than make greater investments in its own business?

A)Use the excess cash to acquire other businesses.
B)Use the excess cash to increase dividends.
C)Do nothing and become "cash rich."
D)All of the above are realistic scenarios.