Deck 8: Financial Planning and Control

Question 1

The degree of financial leverage for Aries Inc.is 3.0, and the degree of financial leverage for Common Capital Corporation is 6.2.According to this information, which firm is considered to have greater overall (total) risk?

A) Aries Inc.
B) Common Capital Corporation.
C) The degree of financial leverage is a measure of financial risk, so the only conclusion that can be made with the information given is that Common Capital Corporation has greater financial risk than Aries Inc.⎯ we cannot tell which firm has greater total risk.
D) To determine which firm has the greater total risk, we need to know the financial breakeven point of each firm.
E) None of the above is a correct answer.

Answer 1

The degree of financial leverage is a measure of financial risk, so the only conclusion that can be made with the information given is that Common Capital Corporation has greater financial risk than Aries Inc.⎯ we cannot tell which firm has greater total risk.

Question 2

If a firm's degree of total leverage (DTL) is 8.0, which of the following must be correct?

A) The firm must have fixed operating costs.
B) The firm must have fixed financial costs.
C) The firm must have both fixed operating costs and fixed financial costs.
D) The firm must have some fixed costs, but not enough information is given to determine whether the fixed costs are operating, financial, or both.
E) With the information given, we cannot tell whether the firm has any fixed costs (either operating or financial) at all.

Answer 2

The firm must have some fixed costs, but not enough information is given to determine whether the fixed costs are operating, financial, or both.

Question 3

The degree of operating leverage for ABC Inc.is 3.5, and the degree of operating leverage for XYZ Corporation is 7.0.According to this information, which firm is considered to have greater business risk?

A) ABC Inc.
B) XYZ Corporation.
C) The degree of operating leverage is not a measure of business risk, so it is not possible to tell which firm has the greater business risk given the above information.
D) To determine which firm has the greater business risk, we need to know the operating income (NOI or EBIT) of each firm.XYZ Corporation would have less business risk if its operating income is at least twice that of ABC Inc.
E) None of the above is a correct answer.

Answer 3

XYZ Corporation.

Question 4

Assume a portion of a firm's long-term funds includes either debt or preferred stock.Which of the following statements is correct?

A) The firm must possess operating leverage, which means that a change in net income will result in a greater percentage change in earnings before interest and taxes (EBIT).
B) The firm has financial leverage, which means that a change in sales will result in a greater percentage change in EBIT.
C) The firm has financial leverage, which means that a change in EBIT will result in a greater percentage change in earnings per share (EPS).
D) The firm doesn't have leverage, because leverage is created through the use of common equity financing only.
E) None of the above is a correct answer.

Question 5

The degree of financial leverage for ABC Inc.is 2.5, and the degree of financial leverage for XYZ Corporation is 1.5.According to this information, which firm is considered to have greater financial risk?

A) ABC Inc.
B) XYZ Corporation.
C) The degree of financial leverage is not a measure of financial risk, so it is not possible to tell which firm has the greater financial risk given the above information.
D) To determine which firm has the greater financial risk, we need to know the operating income (NOI or EBIT) of each firm.XYZ Corporation would have less financial risk if its operating income is at least twice that of ABC Inc.
E) None of the above is a correct answer.

Question 6

Which of the following statements is correct?

A) The first pass using the projected balance sheet method determines the financing feedback effects and determines how much in additional funds are needed.The second pass completes the cycle, identifies the full financing need, and eliminates further feedback effects.
B) Interest expense on additional new debt is the only income statement account affected by financing feedback, and dividends payable to new common stock is the only balance sheet account affected.
C) The projected balance sheet method is useful for determining additional funds needed, however, it cannot be used in evaluating dividend policy and capital structure decisions.
D) One reason a firm's managers may choose to meet additional funds needed requirements through common stock is that it involves no financing feedback effects.Since no new debt is used, interest expense will be considered fully in the first pass, the income statement will remain unchanged, and no second pass is needed.
E) If new debt and new stock are used to meet new financing needs, net income will decrease from the first pass to the second pass even though taxes decrease.In addition, if dividends are to be paid on new stock, this will further decrease the amount of retained earnings available for financing needs.

Question 7

The projected balance sheet method of forecasting is based on which of the following assumptions?

A) All balance sheet accounts are tied directly to sales.
B) Most balance sheet accounts are tied directly to sales.
C) The current level of total assets is optimal for the current sales level.
D) Answers a and c above.
E) Answers b and c above.

Question 8

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

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

Question 9

Which of the following statements about cash management is false?

A) Depreciation expense does not appear explicitly on the cash budget, but its tax effects are included.
B) If cash flows are not uniform during the month, then weekly or perhaps daily cash budgets should be prepared rather than monthly budgets.
C) Compensating balance requirements do not affect a firm's target cash balance.
D) Cash management involves costs, and it is important to analyze whether the benefits received outweigh the costs included.
E) The cash budget is the foundation of good cash management.

Question 10

Other things held constant, which of the following statements is correct if a firm currently is operating at its financial breakeven point?

A) EBIT must be greater than zero.
B) EBIT would equal zero if the firm is financed only with common stock (i.e., there is no debt or preferred stock).
C) EBIT would equal zero, hence EPS would be less than zero, if the firm has preferred stock but no debt.
D) EPS would equal zero only if the firm is financed with some amount of debt.
E) The firm would not be considered to have much financial risk, especially when compared to a firm that operates well above its financial breakeven point.

Question 11

Which of the following is a key determinant of operating leverage?

A) Level of debt.
B) Physical location of production facilities.
C) Cost of debt.
D) Technology.
E) Capital structure.

Question 12

The projected balance sheet forecasting method produces accurate results unless which of the following condition(s) is (are) present?

A) Fixed assets are "lumpy."
B) Strong economies of scale are present.
C) Excess capacity exists because of a temporary recession.
D) Answers a, b, and c all make the projected balance sheet method inaccurate.
E) Answers a and c make the projected balance sheet method inaccurate, but, as the text explains, the assumption of increasing economies of scale is built into the projected balance sheet method.

Question 13

Which of the following statements is correct?

A) Any forecast of financial requirements involves determining how much money the firm will need and is obtained by adding together increases in assets and spontaneous liabilities and subtracting operating income.
B) The projected balance sheet method of forecasting financial needs requires only a forecast of the firm's balance sheet.Although a forecasted income statement helps clarify the financing needs, it is not essential to the balance sheet method.
C) Because dividends are paid after taxes from retained earnings, dividends are not included in the projected balance sheet method of forecasting.
D) The projected balance sheet method forces recognition of the fact that new financing creates additional financial obligations.For instance, new financing can increase expenses which can actually decrease taxes but increase the projected financial need.
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 needed capital.

Question 14

The financial breakeven point for a firm is defined as the level of ____ that produces ____ equal to zero.

A) sales; EBIT.
B) sales; gross profit.
C) EPS; sales.
D) gross profit; EBIT.
E) EBIT; EPS.

Question 15

The degree of operating leverage has which of the following characteristics?

A) The closer the firm is operating to breakeven quantity, the smaller the DOL.
B) A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output, other things held constant.
C) The DOL is not a fixed number for a given firm, but will depend upon the time zero values of the economic variables Q (Quantity), P (Price), and V (Volume).
D) The DOL relates the change in net income to the change in net operating income.
E) If the firm has no debt, the DOL will equal 1.

Question 16

Holding other things constant, the additional funds required for financing the firm's operations would be reduced with an increase in the firm's

A) Dividend payout ratio.
B) Profit margin.
C) Cost of external funds.
D) Expected growth rate in sales.
E) Tax rate.

Question 17

Which of the following is a key determinant of financial leverage?

A) Level of debt.
B) Technology.
C) Labor costs.
D) Amount of fixed assets used by the firm.
E) Variable cost of goods sold.

Question 18

The degree of financial leverage has which of the following characteristics?

A) The closer the firm is operating to its financial breakeven point, the smaller the DFL.
B) Other things held constant, if a firm has fixed financial costs, such as interest, a change in EBIT will result in an equivalent change in EPS.
C) For a particular firm, the DFL is not a fixed number⎯its value depends on the level of operations and the fixed financial costs associated with those operations.
D) The DFL relates the change in EBIT to the change in sales.
E) If a firm has common stock, it is impossible for its DFL to equal 1.0.

Question 19

Which of the following is (are) typically part of the cash budget?

A) Payments lag.
B) Payment for plant construction.
C) Cumulative cash.
D) All of the above.
E) Only answers a and c above.

Question 20

Which of the following statements is correct?

A) One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income.
B) The first, and most critical, step in constructing a set of pro forma financial statements is establishing the sales forecast.
C) Pro forma financial statements as discussed in the text are used primarily to assess a firm's historical performance.
D) All else equal, if a firm operates at full capacity, the greater its payout ratio, the less additional funds that will be needed for a particular growth in sales.
E) The projected balance sheet forecasting method produces accurate results when fixed assets are lumpy and when economies of scale are present.

Question 21

Hensley Corporation uses breakeven analysis to study the effects of expansion projects it considers.Currently, the firm's plastic bag business segment has fixed operating costs of $120,000, while its unit price per carton is $1.20 and its variable unit cost is $0.60.The firm is considering a new bag machine and an automatic carton folder as modifications to its existing production lines.With the expansion, fixed costs would rise to $240,000, but variable cost would drop to $0.41 per unit.One key benefit is that Hensley can lower its wholesale price to its distributors to $1.05 per carton (i.e., its selling price), and this would likely more than double its market share, as it will become the lowest cost producer.What is the change in the operating breakeven volume with the proposed project?

A) 100,000 units
B) 175,000 units
C) 75,000 units
D) 200,000 units
E) 0 units

Question 22

Hogan Inc.generated EBIT of $240,000 this past year using assets of $1,100,000.The interest rate on its existing long-term debt of $640,000 is 12.5 percent and the firm's tax rate is 40 percent.The firm paid a dividend of $1.27 on each of its 37,800 shares outstanding from net income of $96,000.The total book value of equity is $446,364 of which the common stock account equals $335,000.The firm's shares sell for $28.00 per share in the market.The firm forecasts a 10% increase in sales, assets, and EBIT next year, and a dividend of $1.40 per share.If the firm needs additional capital funds, it will raise 60% with debt and 40% with equity.The cost of any new debt will be 13%.Spontaneous liabilities are estimated at $15,000 for next year, representing an increase of 10% over this year.Except for spontaneous liabilities, the firm uses no other sources of current liabilities and will continue this policy in the future.What will be the cumulative AFN Hogan will need to balance its projected balance sheet using the projected balance sheet method through the first two passes?

A) $5,013
B) $3,417
C) $51,156
D) $26,228
E) $54,573

Question 23

Projected Balance Sheet Method
Trident Food Corporation
Trident Food Corporation generated the following income statement for the most recent fiscal year, which ended December 31, 2010: Each item of inventory Trident Foods produces has a selling price of $20.
Refer to Trident Food Corporation.What 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 24

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.What is Marcus' degree of operating leverage in sales dollars?

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

Question 25

Stromburg Corporation makes surveillance equipment for intelligence organizations.Its sales are $75,000,000.Fixed operating costs, including research and development, are $40,000,000, while variable costs amount to 30% of sales.Stromburg plans an expansion which will generate additional fixed costs of $15,000,000, decrease variable costs to 25% of sales, and also permit sales to increase to $100,000,000.What is Stromburg's DOL at the new projected sales level?

A) 3.75
B) 4.20
C) 3.50
D) 4.67
E) 3.33

Question 26

Which of the following statements is correct?

A) Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), so depreciation is set forth on a separate line in the cash budget.
B) If cash inflows and cash outflows occur on a regular basis, such as the situation where inflows from collections occur in equal amounts each day and most payments are made regularly on the 10^th of each month, then it is not necessary to use a daily cash budget.A cash budget prepared at the end of the month will suffice.
C) Cash budgets are more important for fast food retailers, such as McDonald's, which deal primarily with cash than for manufacturers, such as General Motors, that generally sell on credit.
D) When constructing a cash budget, it probably is easier to forecast cash inflows than cash outflows.
E) All of the above statements are false.

Question 27

A firm has the following balance sheet: Fixed assets are being used at 80 percent of capacity; sales for the year just ended were $200; sales will increase $10 per year for the next 4 years; the profit margin is 5 percent; and the dividend payout ratio is 60 percent.Assume that fixed assets cannot be sold.What are the total external financing requirements for the entire 4 years, i.e., the total AFN for the 4-year period?

A) $4.00
B) $2.00
C) −$0.80 (Surplus)
D) −$14.00 (Surplus)
E) $0

Question 28

Elephant Books sells paperback books for $7 each.The variable cost per book is $5.At current annual sales of 200,000 books, the publisher is just breaking even.It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1.Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?

A) $600,000
B) $466,667
C) $333,333
D) $200,000
E) None of the above.

Question 29

Carolina Vineyards is considering two alternative production methods for turning grapes into wine.One method calls for using a hand-operated press, while the other would employ a new, automated press.It has been estimated that the variable cost per bottle will amount to $2.00 using the old press and $0.50 using the new machine.If the new machine is purchased, fixed operating costs will equal $150,000, and interest charges will be $80,000.Fixed operating costs of $25,000 will be incurred if the company decides to use the old press, and interest costs will be zero because no debt will be needed.Assume that sales (in units) will be 100,000 bottles under the automated method and 75,000 units under the labor intensive method.What sales price per unit would cause Carolina to be indifferent between the two methods?

A) $2.00
B) $2.20
C) $4.00
D) $4.20
E) $6.00

Question 30

A firm has the following balance sheet: Sales for the year just ended were $400, and fixed assets were used at 80 percent of capacity, but its current assets were at optimal levels.Sales are expected to grow by 5 percent next year, the profit margin is 5 percent, and the dividend payout ratio is 60 percent.How much additional funds (AFN) will be needed?

A) $4.6
B) −$6.4 (Surplus)
C) $2.4
D) −$4.6 (Surplus)
E) $0.8

Question 31

You have been given the information below on the Crum Company.Crum expects sales to grow by 50% in 2011, and operating costs should increase at the same rate.Fixed assets were being operated at 40% of capacity in 2010, but all other assets were used to full capacity.Underutilized fixed assets cannot be sold.Current assets and spontaneous liabilities should increase at the same rate as sales during 2011.The company plans to finance any external funds needed as 35% notes payable and 65% common stock.After taking financing feedbacks into account, and after the second pass, what is Crum's projected ROE using the projected balance sheet method? Information on the Crum Company:

A) 16.98%
B) 23.73%
C) 25.68%
D) 19.61%
E) 23.24%

Question 32

Musgrave Corporation has fixed operating costs of $46,000 and variable costs that are 30% of the current sales price of $2.15.At a price of $2.15, Musgrave sells 40,000 units.Musgrave can increase sales by 10,000 units by cutting its unit price from $2.15 to $1.95, but variable cost per unit won't change.Should it cut its price?

A) No, EBIT decreases by $6,000.
B) No, EBIT decreases by $250.
C) Yes, EBIT increases by $11,500.
D) Yes, EBIT increases by $8,050.
E) Yes, EBIT increases by $5,050.

Question 33

Projected Balance Sheet Method
Trident Food Corporation
Trident Food Corporation generated the following income statement for the most recent fiscal year, which ended December 31, 2010: Each item of inventory Trident Foods produces has a selling price of $20.
Refer to Trident Food Corporation.What is the degree of operating leverage for Trident Foods?

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

Question 34

Martin Corporation currently sells 180,000 units per year at a price of $7.00 per unit; its variable cost is $4.20 per unit; and fixed operating costs are $400,000.Martin is considering expanding into two additional states which would increase its fixed costs to $650,000 and would increase its variable unit cost to an average of $4.48 per unit.If Martin expands it expects to sell 270,000 units at $7.00 per unit.By how much will Martin's operating breakeven sales dollar level change?

A) $183,333
B) $456,500
C) $805,556
D) $910,667
E) $1,200,000

Question 35

Texas Products Inc.has a division which makes burlap bags for the citrus industry.The unit has operating fixed costs of $10,000 per month, and it expects to sell 42,000 bags per month.If the variable cost per bag is $2.00, what price must the division charge in order to break even?

A) $2.24
B) $2.47
C) $2.82
D) $3.15
E) $2.00

Question 36

You are the owner of a small business which has the following balance sheet: Fixed and current assets are fully utilized, and the sales/assets and sales/spontaneous liabilities ratios will remain constant.Next year you expect sales to increase by 50 percent.You also expect to retain $2,000 of next year's earnings within the firm.What is next year's additional external funding requirement, i.e., what is your firm's AFN?

A) No additional funds are required.
B) $3,500
C) $4,500
D) $5,500
E) The answer depends on this year's sales level.

Question 37

Kulwicki Corporation wants to determine the effect of an expansion of its sales on its operating income (EBIT).The firm's current DOL is 2.5.It projects new unit sales to be 170,000, an increase of 45,000 over last year's level of 125,000 units.Last year's EBIT was $60,000.Based on a DOL of 2.5, what is this year's projected EBIT with the increase in sales?

A) $60,000
B) $175,000
C) $100,000
D) $90,000
E) $114,000

Question 38

Jill's Wigs Inc.had the following balance sheet last year: Jill has just invented a non-slip wig for men which she expects will cause sales to double, increasing after-tax net income to $1,000.She feels that she can handle the increase without adding any fixed assets.(1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?

A) No; zero
B) Yes; $7,700
C) Yes; $1,700
D) Yes; $700
E) No; there will be a $700 surplus.

Question 39

The Price Company will produce 55,000 widgets next year.Variable costs will equal 40 percent of sales, while operating fixed costs will total $110,000.At what price must each widget be sold for the company to achieve an EBIT of $95,000?

A) $2.00
B) $4.45
C) $5.00
D) $5.37
E) $6.21

Question 40

Compuvac Company has just completed its first pass forecast using the projected balance sheet method.The firm has determined that it needs $4 million in new debt which 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 less under the second pass than they were under the first pass based on a 40% tax rate.Given this information, what is the incremental change in AFN for Compuvac going from the first pass to the second pass?

A) $240,000
B) $0
C) $480,000
D) $160,000
E) $640,000

Question 41

Silver King Inc.is currently running at 60 percent of full capacity.The plant and equipment are currently valued $125 million and Silver King generated sales of $90 million.What is the full capacity sales of Silver King with their current assets?

A) $208 million
B) $150 million
C) $125 million
D) $144 million
E) $100 million

Question 42

Underestimating the sales in your forecast could have which of the following effects on the firm?

A) The firm could acquire too many fixed assets.
B) The firm would have higher costs for depreciation and storage.
C) The firm could lose market share to their competitors.
D) The firm would have too high of a total asset turnover.

Question 43

Which method estimates additional funds needed for a firm by projecting the assets needed for the coming and subtracting the projected liabilities spontaneously generated.

A) Spontaneous method
B) Additional funds needed method
C) Feedback method
D) Projected balance sheet method

Question 44

Projected Balance Sheet Method
Trident Food Corporation
Trident Food Corporation generated the following income statement for the most recent fiscal year, which ended December 31, 2010: Each item of inventory Trident Foods produces has a selling price of $20.
Refer to Trident Food Corporation.How many units of inventory must Trident Foods sell if it wants to operate at its financial breakeven point?

A) 2,000
B) 500
C) 4,800
D) 2,280
E) 6,800

Question 45

Which of the following liabilities increase typically and create spontaneously generated funds as sales increase for the firm?

A) Long-term debt
B) Accrued wages
C) Accounts receivable
D) Property, plant, and equipment

Question 46

NJM Incorporated is a football manufacturer.NJM has fixed operating costs of $400,000 and variable costs of $12 per football.The footballs sell for $35 each and NJM plans to sell 300,000 footballs this year.What are NJM's total operating costs for the year?

A) $10,900,000
B) $4,000,000
C) $3,600,000
D) $3,200,000
E) $400,000

Question 47

Breakeven analysis is the method of determining the point at which sales will just cover ____ costs.

A) labor
B) inventory
C) operating
D) financing

Question 48

Which of the following business decisions can be improved using breakeven analysis?

A) New product decisions
B) An expansion in the level of the firm's operations
C) Modernization and automation projects
D) An evaluation of the riskiness of operations
E) Breakeven analysis can be used to improve all of the above business decisions

Question 49

Projected Balance Sheet Method
Trident Food Corporation
Trident Food Corporation generated the following income statement for the most recent fiscal year, which ended December 31, 2010: Each item of inventory Trident Foods produces has a selling price of $20.
Refer to Trident Food Corporation.What is the financial breakeven point for Trident Foods?

A) EBIT = $146,500
B) Sales = 4,800 units
C) EBIT = $10,000
D) Net income = $10,000
E) EBIT = $11,400

Question 50

JT Inc.produces gourmet frozen dinners for the airline industry.JT has fixed costs of $200,000 and variable costs of $8 per frozen dinner.The selling price per frozen dinner is $13 and JT plans to sell 150,000 frozen dinners this year.If JT sells the 150,000 frozen dinners they planned to sell what will JT's operating profit be this year?

A) $1,950,000
B) $1,750,000
C) $750,000
D) $550,000
E) $1,000,000

Question 51

Projected Balance Sheet Method
Trident Food Corporation
Trident Food Corporation generated the following income statement for the most recent fiscal year, which ended December 31, 2010: Each item of inventory Trident Foods produces has a selling price of $20.
Refer to Trident Food Corporation.What is the operating breakeven point in sales units (Q) for Trident Foods?

A) 7,500
B) 5,625
C) 6,825
D) 4,800
E) 2,700

Question 52

All else being equal, which of the following will lower the breakeven point of a firm?

A) higher fixed costs
B) lower selling price
C) lower variable costs
D) none of the above

Question 53

Warsaw Incorporated is currently operating at 80% of capacity.The sales of Warsaw were $25 million this year and their net plant and equipment were valued at $100 million.Sales are expected to increase to $35 million next year.How much additional plant and equipment will Warsaw need to acquire to keep production up with the new level of sales?

A) $20 million
B) $15 million
C) $12 million
D) $10 million
E) No additional plant and equipment is needed.

Question 54

If a firm has a high degree of leverage then a small change in sales results in

A) an unpredictable change in expected profits
B) a very small change in expected profits
C) no change in expected profits
D) a large change in expected profits.

Question 55

Which of the following would generally be considered variable costs?

A) Labor
B) Rent
C) Insurance
D) Depreciation

Question 56

Forecasting financial requirements for a firm involves determining how much money the firm will

A) generate internally.
B) have to raise externally.
C) need during a given period.
D) All of the above.

Question 57

The firm is concerned with implementing the financial plans, and with managing the feedback and adjustment process needed to ensure that the goals of the firm are met during which stage of the planning and control process

A) control stage
B) planning stage
C) forecasting stage
D) budgeting stage

Question 58

To forecast the balance sheet, the firm must:

A) Project the asset requirement for the coming period.
B) Project the liabilities and equity that will be provided by normal operations.
C) Estimate the additional funds needed.
D) All of the above.

Question 59

What is the next step in the financial planning process after a firm develops a sales forecast?

A) determine additional funds needed to finance operations
B) determine the assets required to meet the sales target
C) determine the firm's optimal capital structure
D) estimate the degree of operating leverage

Question 60

All of the following are commonly examples of variable costs for a firm except

A) lease payments
B) labor
C) materials
D) All of the above are variable costs

Question 61

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Question 62

Today, computer simulations models can calculate multiple breakeven charts providing management with an idea of how the firm's breakeven point would change under different assumptions for key variables.

Question 63

As a firm's sales grow, its current asset accounts tend to increase.For instance, as sales increase, the firm's purchases increase and its level of accounts payable will increase.Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.

Question 64

Two key objectives of financial planning and control are to avoid cash squeezes and to improve profitability.

Question 65

Any firm with a positive growth rate in sales will require some amount of external funding, assuming all existing ratios are to be maintained.

Question 66

One situation where operating breakeven analysis can be valuable is when a firm plans to increase fixed investment in order to lower variable cost, such as labor costs.

Question 67

One limitation of operating breakeven analysis is that variable cost must be assumed constant throughout the analysis in order to completely analyze changes in fixed investment.

Question 68

Two firms which have the same operating leverage must also have the same ROA, since operating leverage and ROA both measure the effective utilization of assets by the firm.

Question 69

When a small change in sales results in a large change in operating income, one possible reason is that the firm is employing a relatively high degree of operating leverage.

Question 70

At the firm's operating breakeven point, total revenues and total variable costs are exactly equal.

Question 71

If EBIT doubles when sales doubles, then the firm's degree of operating leverage must be exactly two.

Question 72

The DOL is an index number that measures the effect of a change in sales price on the operating breakeven point.

Question 73

The higher the percentage of a firm's total costs that are fixed, the higher the degree of operating leverage and the lower the operating breakeven point.

Question 74

Operating costs include variable costs, depreciation and interest charges.

Question 75

To determine the amount of additional funds needed, you may subtract the expected increase in liabilities (a source of funds) from the sum of the expected increases in retained earnings and assets (both uses of funds).

Question 76

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.

Question 77

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

Question 78

Breakeven analysis can be used to determine how large sales of a new product must be for the firm to achieve profitability, but it is not useful in studying the effects of a general expansion in the firm's operations.

Question 79

An increase in the firm's inventory balance normally will require additional financing unless the increase is matched by an equally large decrease in some other asset account.

Question 80

Other things held constant, if a firm is operating at a profit and then sales increase, the degree of operating leverage will decline.