Deck 4: Financial Planning

Question 1

Business planning that focuses on short-term financial performance, including cash requirements is called:

A) strategic planning.
B) operational planning.
C) budgeting.
D) forecasting.
E) this level of detail is included in all of the business planning levels.

Answer 1

D

Question 2

Business planning that focuses on the next year and includes detailed revenue targets, profit objectives and compensation systems is called:

A) strategic planning.
B) operational planning.
C) budgeting.
D) forecasting.
E) this level of detail is included in all of the business planning levels.

Answer 2

B

Question 3

Which of the following would not usually be a section of a business plan?

A) Management and staffing
B) Mission and strategy statement
C) Dividend policy
D) Contingencies

Answer 3

C

Question 4

An operating plan:

A) translates business ideas into concrete relatively short-term projections.
B) backs up financial projections with a great deal of detail.
C) concentrates on broad strategic issues despite its shorter term focus.
D) a and b

Question 5

Small business plans differ from large company plans in that:

A) small business plans normally do not discuss strategic planning at all.
B) small business plans usually don't include short-term forecasts.
C) small business plans don't generally discuss the decision to choose the business they are in over others.
D) Both a and b
E) All of the above

Question 6

Budgets are usually:

A) short-run supplements to the strategic plans.
B) quarterly updates to the annual operating plans.
C) especially important in stable industries.
D) usually done in great detail by small businesses.

Question 7

The major audiences for a firm's business plan are:

A) the firm's own management.
B) outside investors.
C) neither a nor b.
D) both a and b.

Question 8

Which of the following sections of a business plan is likely to contain information on why a business is likely to succeed against its competitors?

A) Market analysis
B) Mission and strategy statement
C) Executive Summary
D) Red herring prospectus

Question 9

Large companies tend to do which of the following types of business planning?

A) Strategic planning
B) Operational planning
C) Budgeting and forecasting
D) All of the above

Question 10

Which of the following can help ensure that everyone understands what they have to do in the coming year?

A) Making different people accountable for same tasks
B) The business planning process
C) Comparing actuals with budgets
D) Making accurate financial plans

Question 11

In large companies, the most important planning exercise is:

A) the Strategic Plan.
B) forecasts.
C) quarterly budgets.
D) the annual operating plan.

Question 12

The proper ranking of the four kinds of business plan from longest to shortest term is:

A) budgeting, forecasting, strategic planning, operational planning.
B) strategic planning, budgeting, operational planning, forecasting.
C) forecasting, strategic planning, operational planning, budgeting.
D) strategic planning, operational planning, budgeting, forecasting.
E) strategic planning, forecasting, budgeting, operational planning.

Question 13

Although budgeting and forecasting appear similar, forecasting relates to a shorter time horizon and usually focuses on:

A) cash flow and profitability.
B) capital considerations.
C) human resources.
D) meeting engineering goals.

Question 14

The managerial value of planning includes:

A) the planning process brings the management team together.
B) a resulting road map for running the business.
C) planning that provides credibility to employees.
D) Both a & b
E) All of the above

Question 15

The time period covered by a business plan is often called the:

A) plan's maturity.
B) budget period.
C) planning horizon.
D) planning quarter.

Question 16

Forecasts tend to be:

A) short-term.
B) focused on making either profit or cash flow projections.
C) filled with supporting documentation.
D) Both a & b
E) All of the above

Question 17

Which of the following is not a major reason for developing a business plan?

A) The process helps pull the management team together.
B) The completed plan is a vehicle for communicating managements vision to others.
C) Planning enables management to defend itself against criticism from disgruntled stockholders.
D) The finished plan serves as a roadmap for running the business.

Question 18

All of the following would be considered benefits of implementing an effective business plan except:

A) ensuring that the management team has a clear understanding of the goals of the organization.
B) providing details as to how the goals of the organization are going to be achieved.
C) forecasting external financing requirements.
D) providing a vehicle to share information with investors.
E) all of the above are benefits of business planning.

Question 19

Which of the following correctly states the business plan types that contain the lowest and greatest proportions of financial detail?

A) Lowest - strategic planning; greatest - budgeting
B) Lowest - forecasting; greatest - operational planning
C) Lowest - strategic planning; greatest - forecasting
D) Lowest - operational planning; greatest - budgeting
E) Lowest - forecasting; greatest - budgeting

Question 20

Strategic planning involves broad thinking about a firm's mission, and goals. It usually has a time frame or planning horizon of:

A) 10 to 20 years.
B) one to three years.
C) five years.
D) Any of the above

Question 21

Which of the following is an indirect planning assumption?

A) A 3% reduction in product price
B) A decrease in interest rates from 8% to 7%
C) An improvement in the average collection period from 45 to 40 days
D) None of the above are indirect assumptions.

Question 22

Which of the following is not a kind of business plan?

A) A strategic plan
B) An operational plan
C) A financial plan
D) A budget
E) A forecast

Question 23

The business planning spectrum shows:

A) the range or spectrum of activities that businesses engage in for which they must plan.
B) how differently large and small companies plan.
C) how the different kinds of plans vary from long- to short- range and from conceptual to detailed and numerical.
D) b and c

Question 24

In any financial plan, forecasting interest depends on knowing debt, and forecasting debt depends on knowing interest. This problem of "circularity" can be solved with:

A) an iterative technique.
B) a counter-circular reasoning.
C) additional planning assumptions.
D) calculus.

Question 25

The financial plan is:

A) the financial portion of a business plan.
B) the most important part of the strategic plan.
C) frequently not included in business plans.
D) All of the above

Question 26

Which of the following is not a purpose of business planning?

A) Communicating information to investors
B) Making a statement of goals
C) Credibility and supporting detail
D) Provide pro forma statements based on hypothetical circumstances

Question 27

The accuracy of projected financial statements depends upon:

A) the accuracy of the sales forecast.
B) the stability of the relationships between sales and cost, expense, assets, and liabilities.
C) whether the economy performs as expected.
D) All of the above

Question 28

Which of the following are typical planning assumptions?

A) A 10% increase in sales
B) An increase in interest rates from 9% to 11%
C) A decrease in the firm's inventory turnover from 3x to 2x
D) All of the above

Question 29

Which of the following is true of projecting financial statements?

A) It involves translating planned physical activities into budgeted dollars.
B) It generally involves only making a sales forecast for the future period.
C) It can be constructed only for ongoing businesses.
D) It is easier to do for a new business than an ongoing one.

Question 30

Solving the debt/interest problem using an iterative, numerical approach begins with taking a guess at:

A) ending debt.
B) beginning debt.
C) interest.
D) equity.

Question 31

The sustainable growth rate concept can be used to show that growth depends on four fundamentals. Which of the following is an incorrect statement of one of those fundamentals?

A) Leverage or the use of borrowed money is measured by the equity multiplier.
B) Earnings retention is measured as 1 minus the dividend payout ratio.
C) The firm's talent in asset management is typically measured by ratios like the ACP.
D) Profitability is measured by ROS, the firm's return on sales.

Question 32

Which of the following is likely to involve setting up major short-term goals?

A) Operational planning
B) Budgeting
C) Forecasting
D) Strategic planning

Question 33

Financial plans are begun by forecasting individual line items starting with revenue and stopping before:

A) interest expense.
B) tax expense.
C) operating expense.
D) net income.

Question 34

Which of the following is a long-term exercise in which managers try to predict what the business will do in rough terms?

A) Operational planning
B) Budgeting
C) Strategic planning
D) Controlling

Question 35

Which of the following is true of small business plans?

A) They normally don't make long-term projections.
B) They are consistently done every year.
C) They generally don't include very short-term forecasts.
D) They normally don't undergo intense review by potential investors.

Question 36

Holding all other variables constant, which of the following will increase the sustainable growth rate? An increase in ____.

A) dividend payout ratio
B) return on sales
C) total asset turnover
D) Both b & c
E) All of the above

Question 37

Which of the following is FALSE regarding the business plans of small business?

A) Covers the broadest and most basic strategic issues
B) Similar to annual plans of large business
C) Provides thorough rationale for concrete actions
D) Includes elements of strategic planning

Question 38

The cash budget is prepared for managers to:

A) identify short-term cash inflows and outflows.
B) match expenses with revenue on an accrual accounting basis.
C) discover if the plans of the firm will create a positive or negative profit.
D) All of the above

Question 39

A strategic plan consists of:

A) short-term issues of an organization.
B) detailed and accurate financial projections.
C) concepts and ideas expressed mostly with words.
D) translating business ideas into concrete projections.

Question 40

Which of the following would not qualify as a planning assumption for next year's operations?

A) A 5% reduction in unit sales
B) A 2% increase in the cost of raw materials
C) A 10% increase in human resources support
D) A 1% reduction in interest rates due to the redemption of outstanding bonds
E) All of the above are planning assumptions.

Question 41

Which of the following is true of the financial plan in a reasonably well managed company?

A) The plan should ideally follow the aggressive optimism strategy.
B) The plan should establish measurable goals which result in bonus compensation if achieved.
C) Its stretch goals serve as targets toward which the organization strives and always achieves.
D) Its stretch goal faces a risk of overstating achievable performance because of the bottom-up phenomenon.

Question 42

Which of the following is not a true statement about top-down or bottom-up planning?

A) Bottom-up plans tend to understate achievable performance.
B) Top-down plans may fail to achieve "buy in" at lower levels of the organization.
C) Bottom-up planning has a built-in bias of "ask for more than you need" because managers anticipate having their requests cut during the planning process.
D) Top-down plans are usually conservative because top management doesn't want to disappoint stockholders by not achieving stated goals.
E) Top-down "stretch" plans lose their motivational effect if they set goals that are too difficult to achieve.

Question 43

An important reason for making financial projections is forecasting whether the firm will need money from outside sources in the coming year. If the planning assumptions result in a need for extra money, it shows up in the plan as:

A) a negative net income.
B) a negative equity account.
C) an increase in debt.
D) a very substantial drop in revenue.

Question 44

____ increases the risk in financial planning.

A) Aggressive optimism
B) Stretch planning
C) Top-down planning
D) Both a & b
E) All of the above

Question 45

Holding all other variables constant, which of the following would increase a firm's external funding requirements in the planning period?

A) An increase in assets
B) A decrease in accruals
C) An increase in dividends paid
D) Both a & c
E) All of the above

Question 46

Which of the following is most likely to occur if a firm's equity does not grow as fast as its assets in the long run?

A) Long-term debt will increase
B) Current liabilities will be reduced
C) Dividend-payout ratio will increase
D) Profit margin will decrease

Question 47

Which of the following is true of top-down or bottom-up planning?

A) Bottom-up plans tend to overstate achievable performance.
B) Top-down plans are consolidated from lower management's inputs.
C) Bottom-up plans do not include judgment by top-level executives.
D) Top-down plans are usually conservative.

Question 48

Computers:

A) enable just about anyone to be a competent business/financial planner.
B) have not replaced the need for experience and judgment in formulating planning assumptions.
C) make it easier to assess the risk in planning through scenario analysis.
D) b and c

Question 49

Which of the following would decrease the sustainable growth rate if all other variables are held constant?

A) Increase in dividend payout ratio
B) An increase in equity
C) An increase in net income
D) Both a & b
E) All of the above

Question 50

Which of the following best describes a firm's external funding requirement?

A) Growth in assets minus growth in liabilities minus net income
B) Growth in assets minus net income
C) Growth in assets minus growth in current liabilities minus net income
D) Growth in assets minus growth in current liabilities minus the year's retained earnings
E) Growth in assets minus the current year's retained earnings

Question 51

Holding all other things constant, additional debt financing needed would be reduced with an INCREASE in the firm's:

A) dividend payout
B) return on Sales
C) cost Ratio
D) tax Rate

Question 52

Corporate business plans:

A) routinely forecast substantial improvement in virtually every area.
B) are usually completely candid about areas of the business that are expected to perform poorly.
C) are often overly optimistic because of the enthusiasm of young, lower level managers.
D) usually understate the performance the organization is capable of.

Question 53

Assume the following facts about a firm: $\begin{array}{ll}\text { Projected selling price per urit } & \$ 3.70 / \text { unit } \\\text { Projected monthly urit sales } & 300,000 \text { urits } \\\text { Typical receivables balance } & 1.5 \text { months of sales }\end{array}$ If sales are evenly distributed throughout the year, what is the next year's projected ending accounts receivable balance?

A) $1,665,000
B) $138,750
C) $1,110,000
D) none of the above

Question 54

Management wishes to reduce next year's external funding needs. Which of the following will accomplish this task?

A) Decrease profit margins
B) Decrease the dividend payout ratio
C) Increase the assets/sales ratio
D) None of the above

Question 55

Which of the following is true of the sustainable growth rate concept?

A) It is an empirical measure of a firm's strength.
B) It assumes that the financial ratios change at a constant rate.
C) It assumes that the firm doesn't raise any new equity by selling stock.
D) It is the growth in assets created by additional external funding.

Question 56

Considering each action independently and holding other things constant, which of the following would DECREASE new debt financing needed?

A) A decrease in the dividend payout ratio
B) A decrease in the tax rate
C) A decrease in fixed assets
D) Both a & b
E) All of the above

Question 57

Which of the following is incorrect about the financial plan in a reasonably well managed company?

A) The plan should be the result of a combination of top down and bottom up planning.
B) The plan establishes measurable goals which result in bonus compensation if achieved.
C) Plan goals should always be set well out of reach to motivate stretch performance.
D) Plans generally reflect significant improvements in performance.

Question 58

You're the treasurer of Ipswitch Inc. The president has just had the staff produce a top-down plan that shows great improvements on every issue many of which you seriously doubt will be achieved. The plan will be shared with securities analysts from Wall Street shortly. You're having a private meeting with the bank's loan officer to plan next year's borrowing needs. You should:

A) tell the banker to expect cash flow results in accordance with the official plan, because if the president hears you said anything else he'll fire you.
B) tell the banker the president is an optimist and the bank should be ready to lend Ipswitch a lot more than the plan indicates but you can't tell exactly how much.
C) look for another job because the president is likely to lay the blame for a cash flow miss at your door.
D) share some scenario analyses with the banker.

Question 59

Falcon's projected 20X5 sales are $678 and its 20X4 year-end retained earnings were $1,385. If Falcon projects a 7 percent return on sale (ROS) and expects to pay $12 in total dividends in 20X5, forecast 20X5 year-end retained earnings.

A) $35.46
B) $713.46
C) $1,420.46
D) $1,432.46

Question 60

External funding requirements can be estimated using an equation called the EFR relationship. The simple concept behind this equation is that funds will be needed to the extent of forecasted:

A) growth in assets minus new retained earnings.
B) growth in sales minus all current liabilities minus all retained earnings.
C) assets minus current liabilities minus new retained earnings.
D) growth in assets minus growth in current liabilities minus new retained earnings.

Question 61

Hatter Enterprises has a return on sales of 15%, a total asset turnover of 1.2 and an equity multiplier of 2.0. If the company is projecting a dividend payout ratio of 40%, calculate the firms' sustainable growth rate.

A) 15.8%
B) 17.2%
C) 19.4%
D) 21.6%

Question 62

Marshall Manufacturing is projecting a growth of 10% in sales next year, and a dividend payout of 80%. Based on their growth they are projecting an external financing requirement of $200. They had the following results this year: Sales of $18,000; Current liabilities of $500; Return on Sales of 10%. Calculate what Marshall has projected for assets next year. (Assume that assets, current liabilities, and income grow with the level of sales.)

A) $3,967
B) $4,885
C) $7,106
D) $7,810

Question 63

Devin Corporation generally collects 20 percent of its sales in the month of sale, 30 percent in the next month, 40 percent in the next month, and 10 percent in the third month after the sale. Based on a sales forecast of $60 for March, $100 for April, $75 for May, and $85 for June, estimate cash collections for June.

A) $80.5
B) $83.0
C) $85.5
D) $88.5

Question 64

Exxo Corporation wishes to maintain a 12 percent growth rate in equity. If year 1 equity was $600 and year 2 net income is projected at $150, what retention ratio must Exxo have to maintain the 12 percent growth in equity?

A) 25 percent
B) 48 percent
C) 52 percent
D) 67 percent

Question 65

Assume the following facts about a firm: $\begin{array}{lr}\text { Sales } _ {this year }&\$200,000\\\text { Net income }_ {this year }&\$30,000\\\text { Assets }_ {this year }&\$100,000\\\text { Current liabilities }_ {this year }&\$10,000\\\text { Anticipated growth rate }&10\%\\\text { Proposed dividend payout ratio }&40\%\end{array}$
The firm's external funding requirement for next year is
(Hint: You don't have to remember the EFR formula. Just realize that the funding requirement is the growth in assets less that in current liabilities less next year's retained earnings. A negative result means surplus funds are available.)

A) $10,800
B) ($28,800)
C) ($10,800)
D) $28,800

Question 66

A firm is planning to improve collections next year. Management has forecast an ACP of 45 days which is a substantial improvement over the current ACP. Next year's sales are expected to be $120M. Next year's ending receivables balance should be planned at (Make calculations using ending balances and a 360-day year.)

A) $10M
B) $15M
C) $16.5M
D) $22M

Question 67

Thompson, Inc. has a 40% dividend payout ratio. It's projections for next year include sales of $6 million and a return on sales of 12%. How much should be available in retained earnings to reduce the external funding requirement?

A) $240,000
B) $288,000
C) $360,000
D) $432,000
E) $720,000

Question 68

What is the sustainable growth rate of a firm with the following selected financial results $\begin{array}{ll}\text { Sales } & \$ 20,000 \\\text { Net income } & \$ 1,000 \\\text { Equity multiplier } & 2.5 \mathrm{x} \\\text { Assets } & \$ 10,000 \\\text { Anmual Dividend } & \$ 300\end{array}$

A) 25%
B) 7%
C) 8.75%
D) 17.5%

Question 69

Assume the following facts about a firm: $\begin{array}{lr}\text { Sales } _ {this year }&\$100,000\\\text { Net income }_ {this year }&\$10,000\\\text { Assets }_ {this year }&\$50,000\\\text { Current liabilities }_ {this year }&\$2,000\\\text { Anticipated growth rate }&12\%\\\text { Proposed dividend payout ratio }&60\%\end{array}$
The firm's external funding requirement for next year is
(Hint: You don't have to remember the EFR formula. Just realize that the funding requirement is the growth in assets less that in current liabilities less next year's retained earnings.)

A) $1,280
B) ($960)
C) $1,760
D) $800

Question 70

What is the sustainable growth rate of a firm with the following selected financial results? $\begin{array}{ll}\text { Sales } & \$ 20,300 \\\text { Net income } & \$ 1,015 \\\text { Equity multiplier } & 2 \mathrm{x} \\\text { Assets } & \$ 10,150 \\\text { Annulal Dividend } & \$ 406\end{array}$

A) 12%
B) 8%
C) 10%
D) 6%

Question 71

This year's revenue is $2,000,0000 and the ACP is 75 days. Next year revenue is forecast to grow by 20% and the ACP (based on a year-end balance) is planned to improve to 60 days. What is the forecast for accounts receivable at the end of next year? (Use a 360-day year.)

A) $333,333
B) $500,000
C) $400,000
D) $416,667

Question 72

Figgins Corp. projects a return on sales of 6%, a total asset turnover of 2.0, a debt ratio of 50% and a dividend payout ratio of 30%. What is Figgins' sustainable growth rate?

A) 1.8%
B) 4.2%
C) 7.2%
D) 12.0%
E) 16.8%

Question 73

Frazier Fudge is projecting a growth in sales next year of 10% along with an external financing requirement of $200. They had the following results this year: Sales of $18,000; Assets of $6,460; Current liabilities of $500; Return on Sales of 10%. Calculate their projected dividend payout ratio. (Assume that assets, current liabilities, and income grow with the level of sales.)

A) 80%
B) 60%
C) 40%
D) 20%

Question 74

A firm's management is planning to improve inventory turnover to 9.0 next year. Next year's revenues are expected to be $150M. The firm's cost ratio (COGS as a percent of sales) is 30%. What figure should be planned for next year's inventory balance? Calculate using ending balances and the COGS formulation of inventory turnover.

A) $4M
B) $5M
C) $6M
D) $7M

Question 75

A firm has the following balance sheet. It expects sales to increase 30% over the previous year's level of $9,000, and anticipates retaining $3,000 of its earnings. $\begin{array}{lclc}\text { Cash } & \$ 4,000 & \text { Accountspayable } & \$ 2,500 \\\text { Accountsreceivable } & 3,000 & \text { Accrued expenses payable } & 1,000 \\\text { Inventories } & 2,000 & \text { Longterm debt } & 6,000 \\\text { Net fixed assets } & 12,500 & \text { Common stock } & 8,500\\&&\text { Retained earnings } & 3,500\\\text { Total asssets }&\$21,500&\text { Total liabilities and capjital }&\$21,500\end{array}$ According to the unmodified percentage of sales method, the amount of external funds needed will be:

A) $2,400.
B) $6,450.
C) $3,450.
D) None of the above

Question 76

A firm had year-end retained earnings of $64,100,000. It forecasts net income for the coming year to be $9,400,000. If it plans to pay out 40% of its net income as dividends, what is the estimated balance in retained earnings at the end of the coming year?

A) $53,500,000
B) $61,140,000
C) $67,860,000
D) $73,500,000
E) $69,740,000

Question 77

A firm has the following balance sheet at the end of this year. Next year it expects sales to increase 50% over this year's level of $9,000, and anticipates retaining $2,000 of its earnings. $\begin{array}{lclc}\text { Cash } & \$ 4,000 & \text { Accountspayable } & \$ 2,500 \\\text { Accountsreceivable } & 3,000 & \text { Accrued expenses payable } & 1,000 \\\text { Inventories } & 2,000 & \text { Longterm debt } & 6,000 \\\text { Net fixed assets } & 12,500 & \text { Common stock } & 8,500\\&&\text { Retained earnings } & 3,500\\\text { Total asssets }&\$21,500&\text { Total liabilities and capjital }&\$21,500\end{array}$ According to the unmodified percentage of sales method, the amount of external funds needed next year will be:

A) $8,750.
B) $10,750.
C) $7,000.
D) None of the above

Question 78

A firm is planning for next year and has developed the following information $\begin{array}{lr}\text {This year's sales }&\$ 7.20 \mathrm{M}\\\text {Next year's sales }&\$ 8.28 \mathrm{M}\\\text { This year's Accounts receivable}&\$ 1.00 \mathrm{M}\\\end{array}$
What receivables balance should the firm plan for next year if management intends to reduce the ACP by ten days? (Calculate using ending balances and a 360-day year):

A) $1.15M
B) $0.80M
C) $0.92M
D) none of the above

Question 79

J&J Construction had the following results for this year: Sales of $20,000; Assets of $10,000; Current liabilities of $200; Return on Sales of 10%. If they are projecting a growth in sales of 20% and a dividend payout of 50%, calculate their external financing required. (Assume that assets, current liabilities, and income grow at the same rate as sales.)

A) $520
B) $760
C) $1,140
D) $1,380

Question 80

Blackstone Inc. has a return on sales of 15%, a total asset turnover of 1.2 and a debt ratio of 30%. If the company is projecting a dividend payout ratio of 80%, calculate the firms' sustainable growth rate.

A) 5.15%
B) 8.25%
C) 10.35%
D) 13.45%