Deck 19: Strategic Financial Planning and Forecasting

Question 1

The financing plan documents the company's long-term goals, the strategies that management will use to achieve the goals, and the capabilities the company needs to sustain its competitive position.

Answer 1

False

Question 2

Financial planning deals with establishing sales forecasts for a time horizon set by a company's management.

Answer 2

False

Question 3

The cash budget identifying the time line for cash inflows and outflows included in divisional business plans is part of the financial plan.

Answer 3

True

Question 4

Projected or pro forma statements can be used to analyse the investment alternatives but not to estimate the amounts of external funding needed.

Question 5

In the financing plan, management states that the company will seek to raise funds externally even if sufficient internally generated funds are available to fund projects.

Question 6

Capital expenditures can be one-time investments or routine investments that allow the company to continue its operations.

Question 7

The outputs of the financial planning model are a series of pro forma financial statements and financial ratios based on these statements.

Question 8

Once capital investments are made, they are almost always impossible to reverse.

Question 9

The strategic plan identifies everything but mergers, alliances, and divestments that may happen in the near future.

Question 10

Since sales are often correlated to the regional or national economy, macroeconomic forecasts are incorporated into the model.

Question 11

In the per cent of sales method, all income statement and balance sheet accounts vary directly with sales.

Question 12

The investment plan addresses the issue of what capital resources the management needs to get to achieve their goals.

Question 13

The financial plan focuses on strategic planning and investment planning.

Question 14

The per cent of sales method is a complex financial planning model.

Question 15

Financial statements and sales forecasts are considered major inputs in developing financial planning models.

Question 16

The financing plan deals with how the company is going to secure the funds needed to pay for the capital resources required.

Question 17

The capital intensity ratio measures the dollar amount of sales per dollar invested in assets.

Question 18

In putting together a financial plan, management addresses three main issues through their strategic plan, investment plan, and financing plan.

Question 19

The strategic plan addresses the issue of what capital resources management needs to achieve their goals.

Question 20

Financial models provide management with the ability to prepare projected financial statements.

Question 21

Which one of the following is NOT true about the capital budgeting process?

A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders.
B) Senior management reviews the list.
C) The list is revised to comply with the company's budget constraints.
D) All of the above are true of the capital budgeting process.

Question 22

The financial plan addresses the following issue(s):

A) Where is the company headed?
B) What capital resources does the management need to get there?
C) How is the company going to pay for the resources needed?
D) All of the above.

Question 23

The higher a company's dividend payout ratio, the higher the company's internal growth rate.

Question 24

Fixed assets vary directly with sales when companies are operating at less than full capacity.

Question 25

The sustainable growth rate is the rate of growth that the company can sustain without selling additional debt.

Question 26

According to the text, the financial plan covers a period of

A) one year.
B) three to five years.
C) ten years.
D) None of the above.

Question 27

The strategic plan does NOT identify

A) major areas of investment in real assets.
B) future mergers, alliances, and divestments.
C) working capital strategies.
D) the lines of business a company will compete in.

Question 28

Holding the growth rate constant, the higher the company's payout ratio, the larger the amount of debt or equity financing needed.

Question 29

The three components that make up a financial plan are

A) the strategic plan.
B) the investment plan.
C) the financing plan.
D) All of the above.

Question 30

When a company maintains a constant dividend policy, the company's growth rate has no bearing on the external financing needed.

Question 31

Fixed assets vary directly with sales when companies are operating at full capacity.

Question 32

The strategic plan identifies

A) the lines of business in which a company will compete.
B) major areas of investment in real assets.
C) capital expenditures, acquisitions. and new lines of business.
D) All of the above.

Question 33

Financial planning helps management establish financial and operating goals for the company and to communicate those goals throughout the company.

Question 34

The lower a company's ROE, the lower the company's sustainable growth rate.

Question 35

The higher a company's plowback ratio, the higher the company's sustainable growth rate.

Question 36

All but one of the following issues are addressed in the financial plan.

A) What is the growth rate for a company's main competitor?
B) Where is the company headed?
C) What capital resources does the management need to get there?
D) How is the company going to pay for the resources needed?

Question 37

The sustainable growth rate is the rate of growth that the company can sustain without selling additional equity.

Question 38

The financing plan of a company will indicate

A) the dollar amount of funds that has to be raised externally and the sources of funds available to the company, the desired capital structure for the company, and the company's dividend policy.
B) the dollar amount of funds that has to be raised externally and the sources of funds available to the company, the desired capital structure for the company, and the company's working capital policy.
C) the dollar amount of funds that has to be raised externally and the sources of funds available to the company, the company's dividend policy, and the company's working capital policy.
D) the company's dividend policy, the desired capital structure for the company, and the company's working capital policy.

Question 39

Which one of the following is true about capital expenditures?

A) It is part of a company's investment plan.
B) Once a capital investment is made, they are almost always impossible to reverse.
C) Capital expenditures can be one-time investments or routine investments that allow the company to continue its operations.
D) All of the above are true of capital investments.

Question 40

Companies that are not highly capital intensive are more risky than those that are.

Question 41

Payout and retention ratio: Tradewinds company has revenues of $9,651,220, costs of $6,080,412, interest payment of $511,233, and a tax rate of 34 per cent. It paid dividends of $1,384,125 to shareholders. Find the company's dividend payout ratio and retention ratio.

A) 66%, 34%
B) 25%, 75%
C) 69%, 31%
D) 34%, 66%

Question 42

Planning models other than the simplistic per cent of sales method have

A) all variable costs change directly with sales.
B) working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales.
C) fixed assets that do not always vary directly with sales.
D) All of the above are true.

Question 43

The inputs used in building financial planning models include

A) financial statements, sales forecasts, and the company's investment decisions.
B) pro forma statements, sales forecasts, and macroeconomic variables.
C) pro forma statements, sales forecasts, and financing decisions.
D) none of the above.

Question 44

Capital intensity ratio: Michael Holdings Ltd has total assets of $1,480,072 and sales of $2,236,625. What is the company's capital intensity ratio?

A) 66.2%
B) 53.7%
C) 151.1%
D) None of the above.

Question 45

Which one of the following is NOT part of a financing plan?

A) The dollar amount of funds that has to be raised externally and the sources of funds available to the company
B) The desired capital structure for the company
C) The company's dividend policy
D) All of the above are part of a financial plan.

Question 46

Retention ratio: A company paid out $163,961.60 as dividends on profit of $298,112. What is the company's retention ratio?

A) 55%
B) 45%
C) 50%
D) None of the above.

Question 47

Which one of the following is NOT an input in financial planning models?

A) Financial statements
B) Pro forma financial statements
C) Investment decisions
D) Financing decisions

Question 48

Which one of the following statements is NOT true?

A) Sales forecasts models are typically very basic and use no complicated analysis.
B) are generated within the company.
C) utilize macroeconomic variables as input.
D) All of the above are true.

Question 49

One statement that is NOT true about more sophisticated financial planning model is that:

A) only fixed costs change directly with sales.
B) working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales.
C) fixed assets do not always vary directly with sales.
D) All of the above are true

Question 50

The financial plan focuses on

A) the inventory accounting method decision and the accounts payables decision.
B) the current assets decision and the current liabilities decision.
C) the investment decision and the financing decision.
D) none of the above.

Question 51

The financial plan includes

A) the strategic plan, financing plan, and options plan.
B) the strategic plan, investment plan, and financing plan.
C) the financing plan, investment plan, and options plan.
D) none of the above.

Question 52

Which statement is NOT true for a company that is operating at full capacity?

A) Fixed assets vary directly with sales.
B) Fixed assets can never vary directly with sales.
C) Fixed assets can be incrementally changed.
D) All of the above are true

Question 53

Which one of the following statements is NOT true about financial planning models?

A) Financial statements serve as the first major input and become the baseline to compare the projected financial statements.
B) Macroeconomic forecasts and their impact on the company's sales are also included.
C) Investment and financing decisions are not considered as inputs.
D) Changes in the company's balance sheet and income statement items as a result of the growth in sales are also used in these models.

Question 54

In using more sophisticated planning models, which one of the following statements is NOT true?

A) Current liabilities are likely to vary directly with sales.
B) Long-term liabilities and equity accounts change as a direct result of managerial decisions.
C) Retained earnings will vary directly as sales changes.
D) All of the above are true

Question 55

Capital intensity ratio: Dennis Compton, Ltd has total assets of $5,335,901 and a capital intensity of 53.9%. What is the company's sales?

A) $5,335,901
B) $2,828,028
C) $9,899,631
D) None of the above.

Question 56

Capital intensity ratio: Comacho Traders has total assets of $513,480 and sales of $723,062. What is the company's capital intensity ratio?

A) 1.41
B) 0.71
C) 1.23
D) None of the above.

Question 57

Payout and retention ratio: Drekker Ltd has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 per cent. It paid dividends of $34,125 to shareholders. Find the company's dividend payout ratio and retention ratio.

A) 85%, 15%
B) 45%, 55%
C) 55%, 45%
D) 15%, 85%

Question 58

Which one of the following statements is NOT true?

A) The ratio of total assets to sales is called the capital intensity ratio.
B) The ratio of sales to total assets is called the capital intensity ratio.
C) The higher the ratio, the more capital a company needs to generate sales.
D) Companies that are highly capital intensive are more risky than those that are not.

Question 59

The sales forecasts used in financial planning

A) are developed using a variety of techniques.
B) are generated within the company.
C) utilize macroeconomic variables as input.
D) All of the above are true.

Question 60

In using more sophisticated planning models, which one of the following statements is NOT true?

A) Current liabilities are likely to vary directly with sales.
B) Long-term liabilities and equity accounts change as a direct result of managerial decisions.
C) Retained earnings will vary as sales changes but not directly as it is affected by the company's dividend payout policy.
D) All of the above are true

Question 61

Internal growth rate: Swan Supply Company has profit of $1,212,335 on assets of $12,522,788 and retains 70 per cent of its income every year. What is the company's internal growth rate?

A) 7.6%
B) 6.8%
C) 8.6%
D) 9.3%.

Question 62

Internal growth rate: Mandolin Bottlers has profit of $4,272,335 and retains 65 per cent of its income every year. If the company's internal growth rate is 8.6 per cent, what is the company's total assets?

A) $32,290,904
B) $238,824
C) $30,388,235
D) None of the above.

Question 63

Which one of the following statements is NOT true?

A) The internal growth rate is defined as the maximum growth rate that a company can achieve without external financing.
B) The higher the retained earnings generated by a company, the higher the growth possible without using external funding.
C) Given the same level of retained earnings, a company that has the higher amount of total assets, the higher the growth possible without using external funding.
D) All of the above are true.

Question 64

External financing needed: Sterling Resorts has total assets worth $13,442,975. It is expecting to grow its revenue at a rate of 25 per cent next year. For next year they expect a profit of $3,475,321 and will pay out 45 per cent as dividends. What is the external financing needed by this company to meet its growth expectations?

A) $1,796,849.30
B) $1,449,317.20
C) No external funding is needed.
D) None of the above

Question 65

Addition to retained earnings: Hilton Company has revenues of $1,214,800 and costs of $816,355, and pays a tax rate of 32 per cent. If the company pays out 50 per cent of its earnings as dividends every year, what is the amount of retained earnings?

A) $135,471.30
B) $270,942.60
C) $413,032.00
D) None of the above.

Question 66

Sustainable growth rate: If Merton Company has a ROE of 23.4 per cent, what is the plowback ratio needed to achieve a sustainable growth rate of 7 per cent?

A) 34%
B) 30%
C) 24%
D) 28%

Question 67

Some weaknesses in financial planning models include:

A) Interest expense is not accounted for.
B) All working capital accounts do not necessarily vary directly with sales, especially cash and inventory.
C) How fixed assets are adjusted.
D) All of the above are weaknesses.

Question 68

External funding needed is

A) the additional debt or equity a company needs to issue so that it can purchase additional assets to support an increase in sales.
B) the additional funds raised by a company to pay off existing short-term debt.
C) the additional funds raised by a company to pay off existing long-term debt.
D) None of the above are true.

Question 69

Sustainable growth rate: If Newell Company has a ROE of 18.6 per cent and a dividend payout ratio of 60 per cent, what is its sustainable growth rate?

A) 7.4%
B) 2.15%
C) 0.47%
D) 8.2%

Question 70

External financing needed: Triumph Company has total assets worth $6,413,228. Next year it expects a profit of $3,145,778 and will pay out 70 per cent as dividends. If the company wants to limit its external financing to $1 million, what is the growth rate it can support?

A) 32.9%
B) 6.4%
C) 30.3%
D) 26.5%

Question 71

External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have profit of $2,771,342 and pay out 60 per cent as dividends. If the company wants no external financing, what is the growth rate it can support?

A) 32.9%
B) 25.1%
C) 30.3%
D) 27.3%

Question 72

Companies that achieve higher growth rates without seeking external financing

A) have a high plowback ratio.
B) have less equity and/or are able to generate high profit leading to a high ROE.
C) are not highly leveraged.
D) All of the above are true.

Question 73

External financing needed: Nederland Finance Company has total assets worth $9,751,223. It is expecting to grow its revenue at a rate of 20 per cent next year and will have a profit of $2,213,564 next year. The company pays out 65 per cent of its profit as dividends. What is the external financing needed by this company to meet its growth expectations?

A) $1,175,497.20
B) $511,428.00
C) No external funding is needed.
D) None of the above

Question 74

Companies that achieve higher growth rates without seeking external financing

A) have a low plowback ratio.
B) have less equity and/or are able to generate high profit leading to a high ROE.
C) are highly leveraged.
D) None of the above.

Question 75

Internal growth rate: Meredith Ltd has a return on equity of 21.5 per cent, an equity ratio of 55 per cent, and a dividend payout ratio of 70 per cent. What is the company's internal growth rate?

A) 8.3%
B) 3.6%
C) 6.4%
D) 4.8%

Question 76

Addition to retained earnings: Tangent, Ltd., has revenues of $4,375,233 and costs of $2,467,321, and pays a tax rate of 34 per cent. If the company pays out 60 per cent of its earnings as dividends every year, what is the amount of retained earnings?

A) $171,254.18
B) $755,533.15
C) $503,688.77
D) None of the above.

Question 77

Which one of the following statements about the sustainable growth rate (SGR) is NOT true?

A) The higher a company's ROE, the higher the SGR.
B) The higher the plowback ratio, the larger the proportion of profit retained in the company and the greater the company's SGR.
C) Both a and b are true
D) None of the above.

Question 78

In accounting for changes in fixed assets, which one of the following statements is NOT true?

A) When a company is not operating at full capacity, sales may be increased without adding any new fixed assets.
B) Since it requires time to get new assets operational, they are added in small discrete quantities.
C) Fixed assets are added in large discrete amounts called lumpy assets.
D) All of the above are true.

Question 79

Internal growth rate: Mercantile Company has profit of $3,413,500 on assets of $16,109,445 and retains 55 per cent of its income every year. What is the company's internal growth rate?

A) 21.2%
B) 8.6%
C) 11.7%
D) 9.4%

Question 80

The sustainable growth rate (SGR)

A) is a function of the plowback ratio and the ROE.
B) the rate of growth that the company can sustain without selling additional shares of equity.
C) helps management determine whether they can avoid issuing new equity.
D) All of the above are true of the SGR.