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Financial Management 2017 - Quiz and Case Study Guides - Foundations of Finance, 9e (Keown/Martin/Petty) - Quiz - Chapter 14

Financial Management 2016 - 2017

FINANCIAL MANAGEMENT 2017 - QUIZ AND CASE STUDY GUIDES

Foundations of Finance, 9e (Keown/Martin/Petty)

Chapter 14   Short-Term Financial Planning

 

 

Foundations of Finance, 9e (Keown/Martin/Petty)

Chapter 14   Short-Term Financial Planning

 

Learning Objective 14.1

 

1) The key ingredient in a firm's financial planning is an accurate sales forecast.

Answer:  TRUE

Diff: 1      Page Ref: 467

Keywords:  Financial Planning, Sales Forecast

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

2) Financial forecasting is the process of attempting to estimate a firm's future financing requirements.

Answer:  TRUE

Diff: 1      Page Ref: 467

Keywords:  Financial Forecasting, Financing Needs

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

3) The percent of sales method does not provide a reasonable prediction of asset levels for instances when there are economies of scale in the use of the asset being forecast and when asset purchases are lumpy.

Answer:  TRUE

Diff: 1      Page Ref: 467, 468

Keywords:  Percent of Sales Method, Economies of Scale, Lumpy Assets

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

4) The percent of sales method assumes that all assets and all liabilities increase proportionally with sales, but retained earnings does not.

Answer:  FALSE

Diff: 2      Page Ref: 467, 468

Keywords:  Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

5) A corporation that increases it net profit margin will need less discretionary financing, other things being equal.

Answer:  TRUE

Diff: 1      Page Ref: 469

Keywords:  Net Profit Margin, Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

6) Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.

Answer:  FALSE

Diff: 1      Page Ref: 469

Keywords:  Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

7) For a typical firm expecting higher sales, external financing needed will be greater than discretionary financing needed.

Answer:  TRUE

Diff: 2      Page Ref: 469, 472

Keywords:  External Financing Needed, Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

8) Issuing new short-term bonds to finance an expansion is an example of spontaneous financing.

Answer:  FALSE

Diff: 2      Page Ref: 469

Keywords:  Spontaneous Financing

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

9) If the sales growth rate is greater than zero, then the discretionary financing needed will also be greater than zero.

Answer:  FALSE

Diff: 2      Page Ref: 469, 471

Keywords:  Discretionary Financing Needed, Sales Growth Rate

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

10) Discretionary financing needed must be obtained through additional borrowing because additional equity measured by the increase in retained earnings has already been deducted.

Answer:  FALSE

Diff: 2      Page Ref: 469, 472

Keywords:  Discretionary Financing Needed, Debt, Retained Earnings

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

11) The first step in a corporation's financial forecasting process is the determination of the firm's financing needs.

Answer:  FALSE

Diff: 1      Page Ref: 467

Keywords:  Financial Forecasting, Financing Needs

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

12) In the percent of sales method, a company's asset requirements are based on the company's projected sales level.

Answer:  TRUE

Diff: 1      Page Ref: 468

Keywords:  Percent of Sales Method, Asset Requirement

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

 

13) Notes payable and bonds payable are spontaneous liabilities.

Answer:  FALSE

Diff: 1      Page Ref: 468, 469, 471

Keywords:  Spontaneous Liabilities

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

14) In order to reduce discretionary financing needed, a profitable company could decrease its dividend payout ratio.

Answer:  TRUE

Diff: 1      Page Ref: 469, 471

Keywords:  Discretionary Financing Needed, Dividend Payout Ratio

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

15) The forecasted retained earnings balance is equal to (current retained earnings/current sales) times projected sales for next year.

Answer:  FALSE

Diff: 1      Page Ref: 468

Keywords:  Retained Earnings, Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

16) Discretionary financing needed is equal to projected total assets minus projected total liabilities.

Answer:  FALSE

Diff: 1      Page Ref: 469, 471

Keywords:  Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

17) Discretionary financing needed will be zero when the company's sales growth rate is zero.

Answer:  FALSE

Diff: 1      Page Ref: 469, 471

Keywords:  Discretionary Financing Needed, Sales Growth Rate

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

18) When fixed costs are part of a firm's cost structure, the percent of sales method will understate net income and overstate discretionary financing needed, if sales are increasing.

Answer:  TRUE

Diff: 2      Page Ref: 468

Keywords:  Fixed Costs, Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

19) Traditional financial forecasting takes the sales forecast as given and forecasts the corresponding expenses, assets, and liabilities of the firm.

Answer:  TRUE

Diff: 1      Page Ref: 467

Keywords:  Financial Forecasting, Sales Forecast

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

20) Accounts payable and accrued expenses are known as discretionary sources of financing.

Answer:  FALSE

Diff: 2      Page Ref: 469

Keywords:  Spontaneous Liabilities, Accounts Payable, Accrued Expenses

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

21) One of the virtues of the percent-of-sales method is the precision of the estimate of future financing needs.

Answer:  FALSE

Diff: 1      Page Ref: 468

Keywords:  Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

22) Pro forma financial statements depict the end result of the planning period's operations.

Answer:  TRUE

Diff: 1      Page Ref: 467

Keywords:  Pro Forma Financial Statements

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

23) Accrued expenses represent a spontaneous form of financing.

Answer:  TRUE

Diff: 1      Page Ref: 468, 469

Keywords:  Accrued Expenses, Spontaneous Liabilities

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

24) Discretionary sources of financing are those sources that vary automatically with a firm's level of sales.

Answer:  FALSE

Diff: 1      Page Ref: 469

Keywords:  Discretionary Sources of Financing

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

 

25) A set of estimates which corresponds to the worst and best case outcomes is often desired in preparing a financial forecast.

Answer:  TRUE

Diff: 1      Page Ref: 469

Keywords:  Sensitivity Analysis, Forecasting

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

26) Forecasts of revenues and their related expenses are the basis on which firms forecast their future financing needs.

Answer:  TRUE

Diff: 1      Page Ref: 467

Keywords:  Financial Forecasting

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

27) It is often the case that the planning process has its greatest value when the resulting forecasts have the most error, because the planning process offers its greatest value when the future is the most uncertain.

Answer:  TRUE

Diff: 2      Page Ref: 466, 467

Keywords:  Planning Process

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

28) Purchasing supplies on credit and paying for them 45 days later is an example of discretionary financing.

Answer:  FALSE

Diff: 1      Page Ref: 469, 470

Keywords:  Discretionary Financing

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

29) Spontaneous financing is financing obtained at the last minute due to poor financial planning.

Answer:  FALSE

Diff: 1      Page Ref: 469, 470

Keywords:  Spontaneous Financing

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

30) When preparing pro forma financial statement, the income statement must be prepared first because the projected retained earnings balance on the balance sheet is based on the expected net income.

Answer:  TRUE

Diff: 2      Page Ref: 467

Keywords:  Pro Forma Financial Statements, Retained Earnings

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

31) Discretionary financing needed (DFN) is equal to projected total assets minus projected total liabilities minus projected owners' equity.

Answer:  TRUE

Diff: 1      Page Ref: 469, 471

Keywords:  Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

32) Other things equal, higher net profit margins mean higher discretionary financing needed.

Answer:  FALSE

Diff: 1      Page Ref: 469

Keywords:  Net Profit Margin, Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

33) Other things equal, if a firm increases its dividend payout ratio, its discretionary financing needed will also increase.

Answer:  TRUE

Diff: 1      Page Ref: 469

Keywords:  Dividend Payout Ratio, Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

34) Discretionary financing needed can be positive or zero, but not negative.

Answer:  FALSE

Diff: 2      Page Ref: 469

Keywords:  Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

35) For a growing firm, external financing needed will most likely be greater than discretionary financing needed due to increases in accounts payable and accruals.

Answer:  TRUE

Diff: 2      Page Ref: 472

Keywords:  External Financing Needed, Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

36) Using the percent of sales method, projected common stock on the 2010 pro forma balance sheet is equal to (Common Stock 2009/Sales 2009) times Projected Sales 2010.

Answer:  FALSE

Diff: 2      Page Ref: 472

Keywords:  Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

37) If external financing needed cannot be obtained due to poor market conditions, a firm could reduce the amount needed by increasing its retention ratio.

Answer:  TRUE

Diff: 2      Page Ref: 472

Keywords:  External Financing Needed, Retention Ratio

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

38) The percent of sales forecasting method works well because it accounts for economies of scale in assets such as inventory.

Answer:  FALSE

Diff: 1      Page Ref: 468

Keywords:  Percent of Sales Method, Economies of Scale

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

39) Pro forma statements are important since they formally report the performance of the firm during the previous reporting period.

Answer:  FALSE

Diff: 1      Page Ref: 467

Keywords:  Pro Forma Statements

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

40) The percent of sales method can be used to forecast

  1. A) expenses.
  2. B) assets.
  3. C) liabilities.
  4. D) all of the above

Answer:  D

Diff: 1      Page Ref: 472

Keywords:  Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

41) A company calculates its discretionary financing needed and determines this amount of capital cannot be raised at a reasonable cost. Which of the following would reduce the amount of discretionary financing needed?

  1. A) reduce the company's net profit margin
  2. B) reduce the company's sales growth rate
  3. C) increase the company's dividend payout ratio
  4. D) increase the proportion of the company's sales that are made on credit

Answer:  B

Diff: 2      Page Ref: 469

Keywords:  Discretionary Financing Needed, Sales Growth Rate

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

42) Ribbon Industries reported sales of $3 million and net income of $400,000 for 2010. The retained earnings balance at the end of 2012 is $7 million. Ribbon Industries has a dividend payout ratio of 30%. If sales are expected to increase by 25% next year, what will be the projected balance in retained earnings using the percent of sales method?

  1. A) $7,280,000
  2. B) $6,720,000
  3. C) $7,350,000
  4. D) $8,750,000

Answer:  A

Diff: 2      Page Ref: 472

Keywords:  Retained Earnings, Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

43) Discretionary financing accounts include all of the following EXCEPT

  1. A) long-term debt.
  2. B) notes payable.
  3. C) accrued liabilities.
  4. D) common stock.

Answer:  C

Diff: 2      Page Ref: 469

Keywords:  Discretionary Financing, Accounts Payable

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

44) Using the percent of sales method and assuming that no excess capacity exists, a 20% increase in sales will result in

  1. A) a 20% increase in total assets.
  2. B) a 20% increase in total liabilities.
  3. C) a 20% increase in retained earnings.
  4. D) a 20% increase in the company's profit margin.

Answer:  A

Diff: 2      Page Ref: 473

Keywords:  Percent of Sales Method, Full Capacity

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

45) The CFO of Twine Enterprises expects sales to increase from $8,000,000 in 2010 to $12,000,000 in 2011. Current assets in 2010 are equal to $5,000,000. Using the percent of sales method, projected current assets for 2011 are equal to

  1. A) $5,500,000.
  2. B) $7,083,333.
  3. C) $9,000,000.
  4. D) $7,500,000.

Answer:  D

Diff: 2      Page Ref: 472, 473

Keywords:  Percent of Sales Method, Current Assets

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

46) All of the following will increase the discretionary financing needed EXCEPT

  1. A) decrease the net profit margin.
  2. B) decrease the dividend payout ratio.
  3. C) decrease the sales growth rate.
  4. D) decrease the spontaneous financing.

Answer:  B

Diff: 2      Page Ref: 469

Keywords:  Discretionary Financing Needed, Dividend Payout Ratio

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

47) DAS, Inc. is preparing its financial forecast for next year and its discretionary financing needed is negative. This means that

  1. A) sales growth must be negative.
  2. B) the predicted change in total assets must be negative.
  3. C) the predicted change in spontaneous liabilities and retained earnings must be greater than the predicted change in total assets.
  4. D) the dividend payout ratio must be greater than the predicted growth rate in sales.

Answer:  C

Diff: 2      Page Ref: 469

Keywords:  Discretionary Financing Needed, Spontaneous Liabilities, Retained Earnings

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

48) Potential sources of financing to support an increase in sales include all of the following EXCEPT

  1. A) increase in the dividend payout ratio.
  2. B) increase in spontaneous liabilities.
  3. C) increase in accounts payable.
  4. D) issuance of bonds and/or common stock.

Answer:  A

Diff: 1      Page Ref: 469

Keywords:  Sources of Financing, Spontaneous Liabilities, Retained Earnings, External Financing

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

49) When forecasting fixed asset requirements, the projected fixed asset balance will

  1. A) not increase proportionally with sales if the existing level of fixed assets is sufficient to support current sales.
  2. B) not increase proportionally if excess capacity exists.
  3. C) remain the same since the balance is fixed.
  4. D) always increase proportionally with sales.

Answer:  B

Diff: 1      Page Ref: 472, 473

Keywords:  Fixed Assets, Excess Capacity, Percentage of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

50) Using the percentage of sales method of forecasting,

  1. A) all asset and liability accounts increase or decrease proportionally with sales.
  2. B) only asset accounts increase or decrease proportionally with sales.
  3. C) accounts payable and accrued expenses are the only liabilities that increase or decrease proportionally with sales.
  4. D) all balance sheet accounts increase or decrease proportionally with sales.

Answer:  C

Diff: 1      Page Ref: 472, 473

Keywords:  Percentage of Sales Method, Spontaneous Liabilities

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

51) Which of the following will most likely result in an increase in discretionary funding needed?

  1. A) The company's profit margin increases.
  2. B) The company's dividend payout ratio increases.
  3. C) The company's assets are only operating at 50% of capacity.
  4. D) The company pays its accounts payable in 50 days, up from 45 days.

Answer:  B

Diff: 2      Page Ref: 469

Keywords:  Discretionary Funding Needed, Spontaneous Liabilities

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

52) Fixed assets are often estimated incorrectly by the percent of sales method because

  1. A) fixed assets remain constant and the percent of sales method assumes all assets increase proportionally with sales.
  2. B) fixed asset are very expensive.
  3. C) fixed assets are typically purchased in "lumps" and therefore do not increase proportionally with sales.
  4. D) fixed assets are part of the capital budgeting process.

Answer:  C

Diff: 1      Page Ref: 472, 473

Keywords:  Fixed Assets, Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

53) Using the percentage of sales method, forecasted retained earnings balance is equal to

  1. A) prior year retained earnings plus projected net income less projected dividends.
  2. B) the ratio of retained earnings to sales for the current year multiplied by projected sales for next year.
  3. C) the retained earnings balance for the current year as no changes are made to this financing account when using the percent of sales method.
  4. D) the ratio of retained earnings to sales for the current year multiplied by projected sales for next year, minus dividends paid.

Answer:  A

Diff: 1      Page Ref: 472, 473

Keywords:  Retained Earnings, Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

54) Gerentology Associates, a highly profitable company, is considering two growth strategies, one that will achieve sales growth of 20% in one year, and the other that will achieve 20% growth in sales, but over a 4-year time frame. Assuming Gerentology Associates uses the percent of sales method, which of the following statements is true?

  1. A) Discretionary financing needed will be much greater for the 4-year growth strategy.
  2. B) Discretionary financing needed could be much less for the 4-year growth strategy due to retained earnings.
  3. C) The asset balances at the end of 4 years for strategy two will be much greater than the asset balances required at the end of year one for strategy one.
  4. D) Discretionary financing needed could be much greater for the slow growth strategy because interest charges will accumulate on the company's debt.

Answer:  B

Diff: 2      Page Ref: 472, 473

Keywords:  Discretionary Financing Needed, Retained Earnings

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

55) The first step involved in predicting financing needs is

  1. A) forecasting the firm's sales revenues and expenses over the planning period.
  2. B) estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
  3. C) determining the firm's financing needs throughout the planning period.
  4. D) estimating the cost of debt.

Answer:  A

Diff: 2      Page Ref: 467, 469

Keywords:  Financial Forecasting

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

56) A sales forecast for the coming year would reflect

  1. A) any past trend which is expected to continue.
  2. B) the influence of any events that might materially affect that trend.
  3. C) both A and B.
  4. D) neither A nor B.

Answer:  C

Diff: 1      Page Ref: 467

Keywords:  Sales Forecast

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

57) The "percentage" used in the percent of sales calculation can come

  1. A) from the most recent financial statement item as a percent of current sales.
  2. B) from an average computed over several years.
  3. C) from an analyst's judgment.
  4. D) from any of the above or a combination of the above.

Answer:  D

Diff: 1      Page Ref: 468

Keywords:  Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

58) Spontaneous sources of financing include

  1. A) accounts payable and accrued expenses.
  2. B) notes payable and mortgages payable.
  3. C) long-term debt and capital leases.
  4. D) common stock and paid-in capital.

Answer:  A

Diff: 2      Page Ref: 469

Keywords:  Spontaneous Liabilities

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

59) A discretionary form of financing would be

  1. A) notes payable.
  2. B) accounts payable.
  3. C) accrued expenses.
  4. D) A and B

Answer:  A

Diff: 2      Page Ref: 469, 470

Keywords:  Discretionary Financing

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

60) Which of the following is a spontaneous source of financing?

  1. A) accrued expenses
  2. B) notes payable
  3. C) common stock
  4. D) paid-in-capital

Answer:  A

Diff: 2      Page Ref: 469

Keywords:  Spontaneous Liabilities

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

61) All of the following are useful purposes of pro forma financial statements EXCEPT

  1. A) they provide a useful tool for analyzing the effects of a firm's forecasts on its financial performance.
  2. B) they satisfy the SEC requirement for audited financial disclosure.
  3. C) they can be used to control, or monitor a firm's progress for a planning period.
  4. D) they serve as a benchmark to compare actual results to planned activities.

Answer:  B

Diff: 1      Page Ref: 467

Keywords:  Pro Forma Financial Statements

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

62) Which of the following statements would NOT be a valid use of pro forma financial statements?

  1. A) to determine a firm's needs for financing
  2. B) to enhance a firm's ability to offer shareholders guaranteed operating results
  3. C) to analyze the effects of a firm's forecasts on its financial performance
  4. D) to serve as a benchmark when comparing actual results to planned activities

Answer:  B

Diff: 1      Page Ref: 467

Keywords:  Pro Forma Financial Statements

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

63) Which of the following is the initial and most important step in the preparation of pro forma financial statements?

  1. A) Estimate the levels of investment in current and fixed assets.
  2. B) Determine the rate of interest that will be required for borrowed funds.
  3. C) Project the firm's sales revenues for the planning period.
  4. D) Approximate the cost of raw materials.

Answer:  C

Diff: 1      Page Ref: 467

Keywords:  Pro Forma Financial Statements, Sales Forecast

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

64) The "percent of sales method" is a method of preparing pro forma financial statements. All of the following would be examples of how the "percent of sales method" is developed EXCEPT:

  1. A) Forecast expenses by applying a percent of projected sales, using last year's expenses as a percent of last year's sales.
  2. B) Forecast assets by applying a percent of projected sales, using current year's assets as a percent of current year's sales.
  3. C) Approximate liabilities by applying a percent of projected sales, using the last five-year average of liabilities as a percent of sales.
  4. D) Forecast retained earnings by applying a percent of projected sales, using current year's retained earnings as a percent of current year's sales.

Answer:  D

Diff: 1      Page Ref: 468

Keywords:  Percent of Sales Method, Retained Earnings

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

65) Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts receivable. Make the following assumptions: current year's sales are $45,450,000; current year's cost of goods sold is $26,950,000; sales are expected to rise by 20%. The firm's investment in accounts receivable in the current year is $8,600,000. The firm's marginal tax rate is 35%. What is the projection for next year's accounts receivable?

  1. A) $11,345,000
  2. B) $10,320,000
  3. C) $9,575,000
  4. D) $8,772,000

Answer:  B

Diff: 2      Page Ref: 468

Keywords:  Percent of Sales Method, Accounts Receivable

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

66) Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's inventory. Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%. The firm's investment in inventory in the current year is $5,890,200. What is the projection for next year's inventory?

  1. A) $7,657,260
  2. B) $6,981,250
  3. C) $5,845,500
  4. D) $4,526,600

Answer:  A

Diff: 2      Page Ref: 468

Keywords:  Percent of Sales Method, Inventory

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

67) Discretionary financing needs will be lower if ________. Assume "all else equal."

  1. A) the dividend payout ratio is raised
  2. B) the firm's net profit margin increases
  3. C) sales increase
  4. D) fixed assets are currently at full capacity

Answer:  B

Diff: 2      Page Ref: 469, 471

Keywords:  Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

68) Discretionary financing needs will be higher if ________. Assume "all else equal."

  1. A) the firm's net profit margin increases
  2. B) sales decline
  3. C) the dividend payout ratio is raised
  4. D) excess capacity exists for fixed assets

Answer:  C

Diff: 2      Page Ref: 469, 471

Keywords:  Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

69) Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts payable. Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%. The firm's investment in accounts payable in the current year is $2,218,500. What is the projection for next year's accounts payable?

  1. A) $2,127,000
  2. B) $3,781,750
  3. C) $2,884,050
  4. D) $4,184,000

Answer:  C

Diff: 2      Page Ref: 468

Keywords:  Percent of Sales Method, Accounts Payable

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

70) Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's cost of goods sold. Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%. What is the projection for next year's cost of goods sold?

  1. A) $20,481,000
  2. B) $21,138,900
  3. C) $21,459,200
  4. D) $22,786,400

Answer:  D

Diff: 2      Page Ref: 472

Keywords:  Percent of Sales Method, Cost of Goods Sold

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

71) Spontaneous sources of funds refers to all of the below EXCEPT

  1. A) accruals.
  2. B) a bank loan.
  3. C) accounts payable.
  4. D) common stock.

Answer:  B

Diff: 1      Page Ref: 471

Keywords:  Spontaneous Liabilities

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

72) What differentiates "discretionary financing needs" from "external financing needs"?

  1. A) assets
  2. B) retained earnings
  3. C) sales
  4. D) spontaneous liabilities

Answer:  D

Diff: 1      Page Ref: 469, 472

Keywords:  Discretionary Financing Needed, External Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

73) Which of the following is a limitation of the "percent of sales method" of preparing pro forma financial statements?

  1. A) A firm's investment in accounts receivable is seldom related to sales volume.
  2. B) Not all assets and liabilities increase or decrease as a constant percent of sales.
  3. C) Inventory levels are seldom affected by changes in sales volume.
  4. D) The dividend payout ratio may change from one year to the next.

Answer:  B

Diff: 1      Page Ref: 468

Keywords:  Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

74) At a minimum, the sales forecast for the coming year would reflect

  1. A) any future trend in sales that is expected to begin in the new year.
  2. B) the influence of any anticipated events that might materially affect the sales trend.
  3. C) Both of the above are correct.
  4. D) Neither of the above is correct.

Answer:  C

Diff: 1      Page Ref: 467

Keywords:  Sales Forecast

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

 

75) All of the following are examples of sources of discretionary financing EXCEPT

  1. A) bank loans.
  2. B) notes payable.
  3. C) trade credit.
  4. D) common stock.

Answer:  C

Diff: 1      Page Ref: 469

Keywords:  Discretionary Financing Sources

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

76) Predicting a firm's future financial needs includes all of the following steps EXCEPT

  1. A) review of the firm's sales revenues and expenses over all past planning periods.
  2. B) estimation of investment levels for current and fixed assets.
  3. C) determination of the firm's financing needs for the period.
  4. D) estimation of projected sales and expenses.

Answer:  A

Diff: 1      Page Ref: 467

Keywords:  Forecasting

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

77) CraftCo, Inc.'s projected sales for the first six months of 2012 are given below:

 

Jan.

$500,000

April

$490,000

Feb.

$740,000

May

$740,000

Mar.

$380,000

June

$610,000

 

40% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 10% are collected in the second month following the sale. Cost of goods sold is 60% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $40,000/month. The company's cash balance as of February 28, 2012 will be $25,000. Excess cash will be used to retire short-term borrowing (if any). CraftCo, Inc. has no short term borrowing as of February 28, 2012. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $15,000 at the beginning of each month. What is CraftCo, Inc.'s projected cash balance at the end of March 2012?

  1. A) $301,000
  2. B) $329,000
  3. C) $352,000
  4. D) $361,000

Answer:  B

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

 

78) Plato Industries' projected sales for the first six months of 2012 are given below:

 

Jan.

$250,000

April

$300,000

Feb.

$340,000

May

$350,000

Mar.

$280,000

June

$380,000

 

20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $70,000/month. The company's cash balance as of February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The company must have a minimum cash balance of $40,000 at the beginning of each month. Plato's projected EBIT for March 2012?

  1. A) $42,000
  2. B) $23,000
  3. C) ($28,000)
  4. D) ($60,000)

Answer:  C

Diff: 2      Page Ref: 467

Keywords:  EBIT, Pro Forma Income Statement

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

79) What is the primary tool for short-term financial forecasting?

  1. A) pro forma income statement
  2. B) pro forma balance sheet
  3. C) pro forma cash budget
  4. D) capital budgeting

Answer:  C

Diff: 1      Page Ref: 467

Keywords:  Short-term Financial Forecasting, Pro Forma Cash Budget

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

80) Using the 2012 financial statements for DRE Corporation and this additional information, prepare a pro forma income statement and balance sheet for the year 2013. Determine the discretionary financing needed (DFN) and assume that if the DFN is positive, the company will increase long-term debt, and if DFN is negative, the company will pay back some long-term debt.

 

Sales for next year (2013) are expected to increase by $300,000 to $1,800,000. The firm is running efficiently and at full capacity so that all assets and spontaneous liabilities are expected to increase proportionally with sales. The dividend payout ratio for 2013 will be 40%.

 

                      DRE Corporation

              2012 Financial Statements

 

Income Statement ($)

 

 

 

 

 

Sales

 

1,500,000

Net Income

 

250,000

 

 

 

 

 

 

Balance Sheet ($)

 

 

 

 

 

Cash

 

400,000

Accounts Receivable

 

450,000

Inventory

 

350,000

Property, Plant, & Equipment

 

650,000

Total Assets

 

1,850,000

 

 

 

Accounts Payable

 

200,000

Short Term Notes Payable

 

250,000

Long-term Debt

 

550,000

Common Stock

 

200,000

Retained Earnings

 

650,000

Total Liabilities and Equity

 

1,850,000

 

 

Answer: 

Income Statement ($)

 

 

 

 

 

 

 

Sales

 

1,800,000

 

Net Income

 

300,000

   (250,000/1,500,000) ×1,800,000

 

 

 

 

 

 

 

 

Balance Sheet ($)

 

 

 

 

 

 

 

Cash

 

480,000

 

Accounts Receivable

 

540,000

 

Inventory

 

420,000

 

Property, Plant, & Equipment

 

780,000

 

Total Assets

 

2,220,000

 

 

 

 

 

Accounts Payable

 

240,000

 

Short Term Notes Payable

 

250,000

 

Long-term Debt

 

550,000

   (DFN = $2,220,000 - $2,070,000 =

   $150,000 added to Long-term Debt)

Common Stock

 

200,000

 

Retained Earnings

 

830,000

   (650,000 + (300,000 ∗ (1-.40)))

Total Liabilities and Equity

 

2,070,000

   (Plus $150,000 in additional  

    Long-term Debt)

 

Accounts Payable

 

240,000

 

Short Term Notes Payable

 

250,000

 

Long-term Debt

 

700,000

   (DFN= $2,220,000 - $2,070,000 =

   $150,000 added to Long-term Debt)

Common Stock

 

200,000

 

Retained Earnings

 

830,000

   (650,000 + (300,000) ∗ (1-.40)))

Total Liabilities and Equity

 

2,220,000

 

 

Diff: 2      Page Ref: 467-469

Keywords:  Discretionary Financing Needed, Percent of Sales Method, Pro Forma Financial Statements

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

 

81) Lindsey Insurance Co. has current sales of $10 million and predicts next year's sales will grow to $14 million. Current assets are $3 million and fixed assets are $4 million. The firm's net profit margin is 7 percent after taxes. Presently, Lindsey has $900,000 in accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million in retained earnings) in common equity. Next year, Lindsey projects that current assets will rise in direct proportion to the forecasted sales, and that fixed assets will rise by $500,000. Lindsey also plans to pay dividends of $400,000 to common shareholders.

 

  1. What are Lindsey's total financing needs for the upcoming year?
  2. Given the above information, what are Lindsey's discretionary financing needs?

Answer: 

  1. Projected Financing Needs = Projected Total Assets =

       Projected Current Assets + Projected Fixed Assets =

       $3m/$10m × $14m + $4m + $.5m = $8.7m

 

  1. DFN = Projected Current Assets + Projected Fixed Assets Present LTD -

       Present Owner's Equity - [Projected Net Income-Dividends] - Spontaneous Financing =        $3m/$10m × $14m + $4.5m - $1.1m - $5m[.07 × $14m - $.4m] - $.9m/$10m × $14m

       DFN = $4.2m + $4.5m - $6.1m - $.58m - $1.26m = $.76m

Diff: 2      Page Ref: 469

Keywords:  Discretionary Financing Needed

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

82) The balance sheet of the Emery Company is presented below:

 

                           Emery Company Balance Sheet

                                          March 31, 2010

                                     (Millions of Dollars)

 

Current assets

$18

 

Accounts payable

$9

Fixed assets

38

 

Notes payable

0

Total

$56

 

Long-term debt

15

 

 

 

Common equity

32

 

 

 

 

 

 

 

 

Total

$56

 

For the year ending March 31, 2010, Jackson had sales of $58 million. The common stockholders receive all net earnings of the firm in the form of cash dividends, leaving no funds from earnings available to the firm for expansion (assume that depreciation expense is just equal to the cost of replacing worn-out assets).

 

Construct a pro forma balance sheet for March 31, 2011 for an expected level of sales of $75.4 million. Assume current assets and accounts payable vary as a percent of sales, and fixed assets remain at the present level. Use notes payable as discretionary financing.

Answer: 

                                      Jackson Company

                                Pro Forma Balance Sheet

                                         March 31, 2011

 

Current assets

$23.4

 

Accounts payable

$11.7

Fixed assets

38.0

 

Notes payable

2.7

Total

$61.4

 

Long-term debt

15.0

 

 

 

Common equity

32.0

 

 

 

 

 

 

 

 

Total

$61.4

 

Diff: 2      Page Ref: 467, 468

Keywords:  Pro Forma Financial Statements, Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

83) The cash budget for Parker Processed Meats, Inc. is given below for the fourth quarter of 2010:

 

                            Parker Processed Meats, Inc.

Cash Budget for the Three Months Ending December 31, 2010

 

Cash receipts

 

Oct.

Nov.

Dec.

 

 

 

 

 

Total collections

 

$37,050

$48,075

$69,750

 

 

 

 

 

Cash disbursements:

 

 

 

 

Purchases

 

$45,780

$50,800

$54,250

Wages and salaries

 

$8,500

$8,500

$8,500

Other expenses

 

$4,025

$2,350

$975

Taxes

 

 

 

$16,350

 

 

 

 

 

Total disbursements

 

$54,000

$57,375

$78,165

 

The expected sales for the period are as follows:

Oct.: $116,000        Nov.: $127,000        Dec.: $95,000

The total depreciation expense for the period will be $12,000.

An interest payment on outstanding debt of $13,000 will be made in December. Using the information given above, construct a pro forma income statement for the final quarter of 2010.

Answer: 

            Parker Processed Meats, Inc.

           Pro Forma Income Statement

For the Quarter Ended December 31, 2008

 

Sales

$338,000

Less: Cost of goods sold

$150,830

Gross profits

$187,170

Less:

 

Depreciation expense

$12,000

Wages and salaries

$25,500

Other expenses

$7,350

Net operating income

$142,320

Less: interest expense

$13,000

Earnings before taxes

$129,320

Less: Income taxes

$16,350

Net income

$112,970

 

Diff: 2      Page Ref: 468

Keywords:  Cash Budget, Pro Forma Income Statement

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

84) The balance sheet for the Long Drive Golf Company on September 30, 2010 is presented below:

 

                           Long Drive Golf Company Balance Sheet

                                              September 30, 2010

 

Cash

$528,000

 

Accounts payable

$1,568,000

Accounts receivable

1,216,000

 

Notes payable

752,000

Inventory

2,400,000

 

Total current liabilities

2,320,000

Fixed assets

5,632,000

 

Long-term debt

2,336,000

 

 

 

Common stock

3,200,000

Total assets

$9,776,000

 

Retained earnings

1,920,000

 

 

 

Total liabilities and stockholders' equity

$9,776,000

 

The treasurer of the firm wants to issue $1,200,000 in long-term bonds to be used as follows:

 

  1. $240,000 to reduce accounts payable
  2. $192,000 to retire notes payable
  3. $128,000 to increase cash on hand
  4. $640,000 to increase inventories

 

  1. Assuming that the loan is obtained, construct a pro forma balance sheet for December 31, 2010, for Long Drive Golf Company that reflects the use of the funds provided.
  2. Was the liquidity of Long Drive Golf Company improved by the loan?

Answer: 

                              Long Drive Golf Co.

                         Pro Forma Balance Sheet

                               December 31, 2010

Assets:

 

 

Cash

 

$656,000

Accounts receivable

 

1,216,000

Inventory

 

3,040,000

Total current assets

 

$4,912,000

Fixed assets

 

5,632,000

Total assets

 

$10,544,000

Liabilities and owners' equity:

 

 

Accounts payable

 

$1,328,000

Notes payable

 

560,000

Total current liabilities

 

$1,888,000

Long-term debt

 

$3,536,000

Common stock

 

3,200,000

Retained earnings

 

1,920,000

Total liabilities and stockholders' equity

 

$10,544,000

 

 

  1. The liquidity has improved.

 

 

Current Ratio

Quick Ratio

Before the bond issue

1.79

0.75

After the bond issue

2.60

0.99

 

Diff: 2      Page Ref: 468

Keywords:  Pro Forma Balance Sheet, Liquidity

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

85) The ZYX Corporation is planning to request a line of credit from its bank and wants to estimate its cash needs for the month of September. The following sales forecasts have been made for 2010:

 

           July                         $500,000

           August                     400,000

           September               300,000

           October                    200,000

           November               100,000

 

Collection estimates were obtained from the credit collection department as follows: 20% collected within the month of sale; 70% collected the first month following this sale; and 10% collected the second month following the sale. Payments for labor and raw materials are typically made in the month in which these costs are incurred. Total labor and raw material costs each month are 50% of sales. General administrative expenses are $30,000 per month, lease payments are $10,000 per month, and depreciation charges are $20,000 per month. The corporation tax rate is 40%; however, no corporate taxes are paid in September. Prepare a pro forma income statement and cash budget for September.

 

Answer: 

                           ZYX Corporation

                 Pro Forma Income Statement

                            September, 2010

 

Sales

 

$300,000

Total cost of goods sold

 

150,000

Gross profit

 

$150,000

Depreciation

 

(20,000)

General administrative expenses

 

(30,000)

Lease payments

 

(10,000)

Operating income

 

$90,000

Taxes

 

(36,000)

Net income

 

$54,000

 

                               ZYX Corporation

                                   Cash Budget

                                September, 2010

 

Cash Inflows

 

 

 

Collections from September sales

 

$60,000

 

Collections from August sales

 

280,000

 

Collections from July sales

 

50,000

Total cash inflows

 

$390,000

 

 

 

 

Cash Outflows

 

 

 

Labor and raw materials

 

$150,000

 

General administrative expenses

 

30,000

 

Lease payments

 

10,000

Total cash outflows

 

$190,000

 

 

 

 

Net Inflow (Outflows)

 

$200,000

 

Diff: 2      Page Ref: 468

Keywords:  Percent of Sales Method, Pro Forma Income Statement, Cash Budget

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

 

86) Amalgamated Enterprises is planning to purchase some new equipment. With this new equipment, the company expects sales to increase from $8,000,000 to $10,000,000. A portion of the financing for the purchase of the equipment will come from a $1,000,000 new common stock issue. The company knows that its current assets, fixed assets, accounts payable, and accrued expenses increase directly with sales. The company's net profit margin on sales is 8 percent, and the company plans to pay 40 percent of its after-tax earnings in dividends. A copy of the company's current balance sheet is given below.

 

     Amalgamated Enterprises Balance Sheet

 

Current assets

 

$3,000,000

Fixed assets

 

12,000,000

Total assets

 

$15,000,000

 

 

 

Accounts payable

 

$4,000,000

Accrued expenses

 

1,000,000

Long-term debt

 

3,000,000

Common stock

 

2,000,000

Retained earnings

 

5,000,000

Total liabilities and net worth

 

$15,000,000

 

Prepare a pro forma balance sheet for Amalgamated for next year.

Answer: 

                                                 Amalgamated Enterprises

                                                  Pro Forma Balance Sheet

 

 

 

Present Level (Mil)

Percent of Sales

Projected Based on Sales of $10 Mil

Current assets

 

$3

0.375

  $3.75

Fixed assets

 

 12

1.500

  15.00

Total assets

 

$15

 

$18.75

 

 

 

 

 

Accounts payable

 

$4

0.50

  $5.00

Accrued expenses

 

   1

0.125

   1.25

Long-term debt

 

   3

a.

      4.02d

Common stock

 

   2

a.

      3.00b

Retained earnings

 

   5

a.

     5.48c

Total liabilities and net worth

 

$15

 

$18.75

 

Notes:

  1. Not applicable. These accounts are assumed not to vary directly with sales.
  2. The company issued $1M in new common stock.
  3. The increase in retained earnings is equal to net profit minus dividends paid.

Increase in retained earnings = (.08)($10M)(1-.40) = $.48M

  1. The long-term debt on the projected balance sheet is equal to total assets minus accounts payable, accrued expenses, common stock, and retained earnings.

Long-term debt = $18.75M = $5.0M - $1.25M - $3.0M - $5.48M = $ 4.02M

Diff: 2      Page Ref: 468

Keywords:  Percent of Sales Method, Pro Forma Balance Sheet

Learning Obj.:  L.O. 14.1

AACSB:  Analytical Thinking

87) What is the percent of sales method of financial forecasting?

Answer:  The percent of sales method involves estimating the level of an expense, asset, or liability for a future period as a percentage of the sales forecast. The percentage used can come from the most recent financial statement item as a percentage of current sales, from an average computed over several years, from the judgment of the analyst, or from some combination of these sources.

Diff: 1      Page Ref: 468

Keywords:  Percent of Sales Method

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

88) What are some examples of spontaneous and discretionary sources of financing?

Answer:  Accounts payable and accrued expenses are reasonably expected to rise and fall with the level of firm sales in the percent of sales forecast.  Because these two categories of current liabilities normally vary directly with the level of sales, they are often referred to as sources of spontaneous financing. Included in spontaneous financing are trade credit and other accounts payable that arise spontaneously in the firm's day-to-day operations. Notes payable, long-term debt, common stock, and paid-in capital are not assumed to vary directly with the level of firm sales. These sources of financing are termed discretionary financing, which requires an explicit decision on the part of the firm's management every time funds are raised.

Diff: 1      Page Ref: 469

Keywords:  Discretionary Financing Needed, Spontaneous Liabilities, Retained Earnings

Learning Obj.:  L.O. 14.1

AACSB:  Reflective Thinking

 

Learning Objective 14.2

 

1) When economies of scale exist, the percent of sales method will overestimate the assets required and therefore overestimate the amount of discretionary financing needed.

Answer:  TRUE

Diff: 2      Page Ref: 473

Keywords:  Economies of Scale, Discretionary Financing Needed

Learning Obj.:  L.O. 14.2

AACSB:  Reflective Thinking

 

2) If a firm currently has excess capacity, then using the percent of sales method to forecast its fixed asset balance will likely result in an overestimate of the fixed asset balance and an inflated amount of discretionary financing needed.

Answer:  TRUE

Diff: 2      Page Ref: 473

Keywords:  Excess Capacity, Percent of Sales Method, Discretionary Financing Needed

Learning Obj.:  L.O. 14.2

AACSB:  Reflective Thinking

 

3) AFB, Inc. is expecting sales to increase by 20% next year, but its net fixed assets are expected to remain at their current level. This is an example of

  1. A) economies of scale.
  2. B) lumpy assets.
  3. C) spontaneous financing.
  4. D) discretionary financing.

Answer:  B

Diff: 2      Page Ref: 473

Keywords:  Lumpy Assets, Percent of Sales Method

Learning Obj.:  L.O. 14.2

AACSB:  Reflective Thinking

 

4) Southeast Wood Products, Inc. reports sales of $20,000,000 and inventory of $4,000,000. Southeast's inventory possesses significant economies of scale. Therefore, if the firm's sales increase by 10%, Southeast's inventory will ________ and if Southeast's sales decrease by 10%, Southeast's inventory will ________.

  1. A) increase by more than 10%; increase by more than 10%
  2. B) decrease by more than 10%; decrease by more than 10%
  3. C) increase by more than 10%; decrease by less than 10%
  4. D) increase by less than 10%; decrease by less than 10%

Answer:  D

Diff: 2      Page Ref: 473

Keywords:  Economies of Scale, Percent of Sales Method

Learning Obj.:  L.O. 14.2

AACSB:  Analytical Thinking

 

5) MDX Sales Corp. is expecting a 10% increase in sales next year. MDX has an inventory balance of $1,000,000 and uses the percent of sales forecasting method. Which of the following could explain why the inventory forecast of $1,100,000 might be too high?

  1. A) The current inventory balance of $1,000,000 is lower than usual because of a one-time end of year fire sale.
  2. B) The company is going to change its depreciation method in the coming year.
  3. C) The growth in sales could be as high as 15%.
  4. D) A fixed amount of inventory is required to do business, so inventory doesn't increase proportionally with sales.

Answer:  D

Diff: 1      Page Ref: 473

Keywords:  Percent of Sales Method, Inventory, Base Stock

Learning Obj.:  L.O. 14.2

AACSB:  Analytical Thinking

 

6) The percent of sales method does not accurately estimate the balances for lumpy assets. Which of the following statements best describes the possible errors?

  1. A) If excess capacity exists, the percent of sales method will overestimate asset requirements.
  2. B) The percent of sales method consistently underestimates the forecasted balances of lumpy assets.
  3. C) The percent of sales method consistently overestimates the forecasted balances of lumpy assets.
  4. D) If fixed assets are utilized at full capacity currently, the percent of sales method will underestimate the forecasted fixed asset balance.

Answer:  A

Diff: 2      Page Ref: 473

Keywords:  Lumpy Assets, Percent of Sales Method, Excess Capacity

Learning Obj.:  L.O. 14.2

AACSB:  Reflective Thinking

 

7) The accuracy of the percent of sales forecast method is impaired if

  1. A) scale economies are present for assets.
  2. B) assets must be purchased in discrete quantities.
  3. C) asset needs are independent of sales level.
  4. D) All of the above impair the accuracy of the percent of sales forecast method.

Answer:  D

Diff: 1      Page Ref: 473

Keywords:  Percent of Sales Method, Economies of Scale, Lumpy Assets

Learning Obj.:  L.O. 14.2

AACSB:  Reflective Thinking

 

8) The term "lumpy asset" means

  1. A) the same thing as assets that exhibit scale economies.
  2. B) assets that can be purchased in incremental units.
  3. C) assets that have economies of scale but not economies of scope.
  4. D) assets that must be purchased in discrete quantities.

Answer:  D

Diff: 1      Page Ref: 473

Keywords:  Lumpy Asset

Learning Obj.:  L.O. 14.2

AACSB:  Reflective Thinking

 

 

9) Under what circumstances does a firm violate the basic relationship underlying the percent of sales forecast method?

Answer:  The percent of sales method of financial forecasting provides reasonable estimates of a firm's financing requirements only when asset requirements and financing sources can be accurately forecast as a constant percent of sales.  There are some fairly common instances in which this type of relationship fails to describe the relationship between an asset category and sales. Two such examples involve assets for which there are scale economies and assets that must be purchased in discrete quantities ("lumpy assets"). Economies of scale are sometimes realized from investing in certain types of assets. These assets do not increase in direct proportion to sales. A lumpy asset, is an asset that must be purchased in large, nondivisible components.

 

Diff: 2      Page Ref: 473

Keywords:  Percent of Sales Method

Learning Obj.:  L.O. 14.2

AACSB:  Reflective Thinking

Learning Objective 14.3

 

1) Budgets should not be used for performance evaluation because there is too much uncertainty involved and this makes it unfair to the person being evaluated.

Answer:  FALSE

Diff: 1      Page Ref: 475

Keywords:  Budget, Performance Evaluation

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

2) The percent of sales method provides a more detailed plan for future financing needs than the cash budget because both pro forma income statements and balance sheets are used in the analysis.

Answer:  FALSE

Diff: 1      Page Ref: 474, 475

Keywords:  Percent of Sales Method, Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

3) Cash budgets do not provide reasonable predictions for asset requirements when the asset purchases are lumpy.

Answer:  FALSE

Diff: 2      Page Ref: 474, 475

Keywords:  Cash Budget, Lumpy Assets

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

4) The percent of sales method provides a general estimate, but the more detailed cash budget will ultimately be used to estimate financing needs.

Answer:  TRUE

Diff: 1      Page Ref: 474, 475

Keywords:  Percent of Sales Method, Cash Budget, Financing Needs

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

5) Cash budgets are completed only on an annual basis because shorter periods of time are too variable and uncertain for meaningful results.

Answer:  FALSE

Diff: 1      Page Ref: 474, 475

Keywords:  Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

6) The annual cash budget not only shows the amount of financing needed for the year, but also when the funds will be needed.

Answer:  TRUE

Diff: 1      Page Ref: 474, 475

Keywords:  Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

7) The cash budget is composed of four elements: cash receipts, cash disbursements, depreciation, and the net change in cash for the period.

Answer:  FALSE

Diff: 1      Page Ref: 474, 475

Keywords:  Cash Budget, Depreciation

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

8) Monthly cash receipts in the cash budget are typically made up of cash sales during the month and collections from credit sales from prior months.

Answer:  TRUE

Diff: 1      Page Ref: 474, 475

Keywords:  Cash Receipts, Credit Sales, Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

9) A budget is a forecast of future events.

Answer:  TRUE

Diff: 1      Page Ref: 474

Keywords:  Budget, Forecast

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

10) The cash budget represents a detailed plan of future cash flows.

Answer:  TRUE

Diff: 1      Page Ref: 474, 475

Keywords:  Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

 

11) The cash budget can be used to provide an estimate of the firm's future financing needs.

Answer:  TRUE

Diff: 1      Page Ref: 474, 475

Keywords:  Cash Budget, Financing Needs

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

12) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects its credit sales 30% in the month of sale, 60% one month after the sale, and 10% two months after the sale.

 

 

Cash Sales

Credit Sales

January

$50,000

  $50,000

February

$70,000

$110,000

March

$55,000

  $95,000

April

$78,000

$130,000

May

$80,000

$105,000

June

$75,000

$148,000

 

What are Matterhorn's total cash receipts for the month of March?

  1. A) $99,500
  2. B) $119,000
  3. C) $150,000
  4. D) $154,500

Answer:  D

Diff: 2      Page Ref: 474, 475

Keywords:  Cash Budget, Cash Receipts

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

 

13) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects its credit sales 30% in the month of sale, 60% one month after the sale, and 10% two months after the sale.

 

 

Cash Sales

Credit Sales

January

$50,000

  $50,000

February

$70,000

$110,000

March

$55,000

  $95,000

April

$78,000

$130,000

May

$80,000

$105,000

June

$75,000

$148,000

 

What are Matterhorn's total cash receipts for the month of April?

  1. A) $208,000
  2. B) $176,000
  3. C) $168,000
  4. D) $98,000

Answer:  B

Diff: 2      Page Ref: 474, 475

Keywords:  Cash Budget, Cash Receipts

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

14) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects its credit sales 30% in the month of sale, 60% one month after the sale, and 10% two months after the sale.

 

 

Cash Sales

Credit Sales

January

$50,000

  $50,000

February

$70,000

$110,000

March

$55,000

  $95,000

April

$78,000

$130,000

May

$80,000

$105,000

June

$75,000

$148,000

 

What are Matterhorn's total cash receipts for the month of May?

  1. A) $185,000
  2. B) $199,000
  3. C) $119,000
  4. D) $176,000

Answer:  B

Diff: 2      Page Ref: 474, 475

Keywords:  Cash Budget, Cash Receipts

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

 

15) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects its credit sales 30% in the month of sale, 60% one month after the sale, and 10% two months after the sale.

 

 

Cash Sales

Credit Sales

January

$50,000

  $50,000

February

$70,000

$110,000

March

$55,000

  $95,000

April

$78,000

$130,000

May

$80,000

$105,000

June

$75,000

$148,000

 

What are Matterhorn's total cash receipts for the month of June?

  1. A) $120,400
  2. B) $147,000
  3. C) $195,400
  4. D) $213,000

Answer:  C

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Cash Receipts

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

16) ABC Corporation began operations on January 1st of this year with a cash balance of $250,000. ABC had sales of $200,000 for the month of January, all on credit. ABC allows its customers 30 days to pay. ABC's expenses for January equal $150,000, and ABC's ending balance in accounts payable at January 31st is $50,000. In its cash budget for January, ABC's ending cash balance should be equal to

  1. A) $300,000 because of GAAP accrual accounting rules.
  2. B) $150,000.
  3. C) $200,000.
  4. D) $100,000.

Answer:  B

Diff: 1      Page Ref: 474-477

Keywords:  Cash Receipts, Cash Budget, Credit Sales

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

 

17) Plimpton Sales presents income statements for the first three months of this year. Revenues are $1,000,000 in January, $1,200,000 in February, and $1,400,000 in March, while expenses total $800,000 in January, $900,000 February, and $1,000,000 in March. Despite the positive net income, the controller believes Plimpton Sales needs to arrange short-term financing of $300,000 to make payroll the next month. Which of the following statements is MOST correct?

  1. A) The controller must have made a mistake since the company's net income for the three months is $900,000.
  2. B) The company's accounts receivable balance has decreased over the past three months.
  3. C) The company's accounts payable balance has increased over the past three months.
  4. D) The company's accounts receivable balance has increased and the accounts payable balance has decreased over the past three months.

Answer:  D

Diff: 2      Page Ref: 474-477

Keywords:  Cash Receipts, Cash Disbursements, Accrual Accounting, Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

18) Which of the following statements is MOST correct concerning the relationship between a company's cash budget and its income statement?

  1. A) If net income is positive for 3 or more months in a row, then cash flow must be positive.
  2. B) If net income is positive, then cash flow must be positive.
  3. C) If net income is positive, then cash flow could be positive or negative, but if net income is negative, cash flow must also be negative.
  4. D) Cash flow could be positive whether net income is positive or negative.

Answer:  D

Diff: 1      Page Ref: 474-477

Keywords:  Cash Budget, Net Income

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

19) CraftCo, Inc.'s projected sales for the first six months of 2012 are given below:

 

Jan.

$500,000

April

$490,000

Feb.

$740,000

May

$740,000

Mar.

$380,000

June

$610,000

 

40% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 10% are collected in the second month following the sale. Cost of goods sold is 60% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $40,000/month. The company's cash balance as of February 28, 2012 will be $25,000. Excess cash will be used to retire short-term borrowing (if any). CraftCo, Inc. has no short term borrowing as of February 28, 2012. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $15,000 at the beginning of each month. What is CraftCo, Inc.'s total cash receipts for April 2010?

  1. A) $460,000
  2. B) $490,000
  3. C) $524,000
  4. D) $560,000

Answer:  A

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Cash Receipts

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

20) CraftCo, Inc.'s projected sales for the first six months of 2012 are given below:

 

Jan.

$500,000

April

$490,000

Feb.

$740,000

May

$740,000

Mar.

$380,000

June

$610,000

 

40% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 10% are collected in the second month following the sale. Cost of goods sold is 60% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $40,000/month. The company's cash balance as of February 28, 2012 will be $25,000. Excess cash will be used to retire short-term borrowing (if any). CraftCo, Inc. has no short term borrowing as of February 28, 2012 Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $15,000 at the beginning of each month. What is CraftCo, Inc.'s total cash disbursements for April 2012?

  1. A) $294,000
  2. B) $334,000
  3. C) $374,000
  4. D) $414,000

Answer:  B

Diff: 2      Page Ref: 474-477

Keywords:  Cash Disbursements, Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

21) CraftCo, Inc.'s projected sales for the first six months of 2012 are given below:

 

Jan.

$500,000

April

$490,000

Feb.

$740,000

May

$740,000

Mar.

$380,000

June

$610,000

 

40% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 10% are collected in the second month following the sale. Cost of goods sold is 60% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $40,000/month. The company's cash balance as of February 28, 2012 will be $25,000. Excess cash will be used to retire short-term borrowing (if any). CraftCo, Inc. has no short term borrowing as of February 28, 2012. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $15,000 at the beginning of each month. What is CraftCo, Inc.'s earnings before interest and taxes for April 2012?

  1. A) $156,000
  2. B) $142,000
  3. C) $133,000
  4. D) $ 93,000

Answer:  A

Diff: 2      Page Ref: 467

Keywords:  Pro Forma Income Statement

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

22) A firm's cash position would most likely be helped by

  1. A) delaying payment of accounts payable.
  2. B) more liberal credit policies for their customers.
  3. C) purchasing land for investment purposes.
  4. D) holding larger inventories.

Answer:  A

Diff: 1      Page Ref: 474-477

Keywords:  Cash Budget, Cash Balance

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

23) A firm's cash position would most likely be hurt by

  1. A) decreasing excess inventory.
  2. B) establishing stricter (shorter) credit terms.
  3. C) retiring outstanding debt.
  4. D) increasing the net profit margin.

Answer:  C

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Cash Balance

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

24) All of the following are found in the cash budget EXCEPT

  1. A) a net change in cash for the period.
  2. B) accounts receivable.
  3. C) cash disbursements.
  4. D) new financing needed.

Answer:  B

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

25) The primary purpose of a cash budget is to

  1. A) determine the level of investment in current and fixed assets.
  2. B) determine financing needs.
  3. C) provide a detailed plan of future cash flows.
  4. D) determine the estimated income tax for the year.

Answer:  C

Diff: 1      Page Ref: 474-477

Keywords:  Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

26) Which of the following is always a non-cash expense?

  1. A) income taxes
  2. B) salaries
  3. C) depreciation
  4. D) none of the above

Answer:  C

Diff: 2      Page Ref: 474-477

Keywords:  Depreciation, Non-cash Expense, Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

27) A company collects 25% of its sales during the month of sale, 65% one month after the sale, and 10% two months after the sale. The company expects sales of $50,000 in August, $80,000 in September, $90,000 in October, and $60,000 in November. How much money is expected to be collected in October?

  1. A) $90,000
  2. B) $79,500
  3. C) $55,000
  4. D) $22,500

Answer:  B

Diff: 2      Page Ref: 474-477

Keywords:  Cash Receipts, Accounts Receivable, Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

28) Plato Industries' projected sales for the first six months of 2012 are given below:

 

Jan.

$250,000

April

$300,000

Feb.

$340,000

May

$350,000

Mar.

$280,000

June

$380,000

 

20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $70,000/month. The company's cash balance as of February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The company must have a minimum cash balance of $40,000 at the beginning of each month. What is Plato Industries' total cash receipts for April 2012?

  1. A) $340,000
  2. B) $326,000
  3. C) $302,000
  4. D) $300,000

Answer:  C

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Cash Receipts

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

29) Plato Industries' projected sales for the first six months of 2012 are given below:

 

Jan.

$250,000

April

$300,000

Feb.

$340,000

May

$350,000

Mar.

$280,000

June

$380,000

 

20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $70,000/month. The company's cash balance as of February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The company must have a minimum cash balance of $40,000 at the beginning of each month. What is Plato Industries' total disbursement in May?

  1. A) $367,500
  2. B) $348,000
  3. C) $425,500
  4. D) $324,000

Answer:  A

Diff: 2      Page Ref: 474-477

Keywords:  Cash Disbursements, Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

30) Plato Industries' projected sales for the first six months of 2012 are given below:

 

Jan.

$250,000

April

$300,000

Feb.

$340,000

May

$350,000

Mar.

$280,000

June

$380,000

 

20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $70,000/month. The company's cash balance as of February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The company must have a minimum cash balance of $40,000 at the beginning of each month. What is Plato Industries' ending cash balance (before borrowing) in March?

  1. A) $12,000
  2. B) $8,000
  3. C) $3,000
  4. D) ($28,000)

Answer:  C

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Cash Balance

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

31) Plato Industries' projected sales for the first six months of 2012 are given below:

 

Jan.

$250,000

April

$300,000

Feb.

$340,000

May

$350,000

Mar.

$280,000

June

$380,000

 

20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $70,000/month. The company's cash balance as of February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The company must have a minimum cash balance of $40,000 at the beginning of each month. Plato's projected cumulative short-term borrowing as of April 30, 2012?

  1. A) $25,000
  2. B) $33,000
  3. C) $50,000
  4. D) $60,000

Answer:  D

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Cumulative Borrowing

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

32) Fielding Wilderness Outfitters had projected its sales for the first six months of 2010 to be as follows:

 

Jan.

$250,000

April

$300,000

Feb.

$340,000

May

$350,000

Mar.

$280,000

June

$380,000

 

Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 20% in the second month following the sale. Total other cash expenses are $40,000/month. The company's cash balance as of March 1st, 2010 is projected to be $40,000, and the company wants to maintain a minimum cash balance of $15,000. Excess cash will be used to retire short-term borrowing (if any exists). Fielding has no short-term borrowing as of March 1st, 2010. Assume that the interest rate on short-term borrowing is 1% per month. What is Fielding's projected total receipts (collections) for April?

  1. A) $124,000
  2. B) $180,000
  3. C) -$4,000
  4. D) $36,000

Answer:  A

Diff: 3      Page Ref: 474-477

Keywords:  Cash Budget, Cash Receipts

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

33) Rawhide Outfitters had projected its sales for the first six months of 2012 to be as follows:

 

Jan.

  $50,000

April

$180,000

Feb.

  $60,000

May

$240,000

Mar.

$100,000

June

$240,000

 

Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 20% in the second month following the sale. Total other cash expenses are $40,000/month. The company's cash balance as of March 1st, 2012 is projected to be $40,000, and the company wants to maintain a minimum cash balance of $15,000. Excess cash will be used to retire short-term borrowing (if any exists). The firm has no short-term borrowing as of March 1st, 2012. Assume that the interest rate on short-term borrowing is 1% per month. What was Rawhides' projected loss for March?

  1. A) $184,000
  2. B) $110,000
  3. C) $84,000
  4. D) none of the above

Answer:  D

Diff: 3      Page Ref: 474-477

Keywords:  Cash Budget, Net Change in Cash

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

34) Rawhide Outfitters had projected its sales for the first six months of 2012 to be as follows:

 

Jan.

  $50,000

April

$180,000

Feb.

  $60,000

May

$240,000

Mar.

$100,000

June

$240,000

 

Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 20% in the second month following the sale. Total other cash expenses are $40,000/month. The company's cash balance as of March 1st, 2012 is projected to be $40,000, and the company wants to maintain a minimum cash balance of $15,000. Excess cash will be used to retire short-term borrowing (if any exists). Fielding has no short-term borrowing as of March 1st, 2012. Assume that the interest rate on short-term borrowing is 1% per month. How much short term financing is needed by March 30, 2012?

  1. A) $110,000
  2. B) $15,000
  3. C) $70,000
  4. D) $85,000

Answer:  D

Diff: 3      Page Ref: 474-477

Keywords:  Cash Budget, Short-term Financing

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

35) LPD Logistics, Inc.'s projected sales for the first six months of 2010 are given below.

 

Jan.

$300,000

April

$350,000

Feb.

$350,000

May

$500,000

Mar.

$475,000

June

$400,000

 

20% of sales are collected in the month of the sale, 75% are collected in the month following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of sales. Purchases are made the month prior to the sales and are paid during the month the purchases are made (i.e. goods sold in March are bought and paid for in February). Total other cash expenses are $35,000/month. The company's cash balance as of February 1, 2010 will be $30,000. Excess cash will be used to retire short-term borrowing (if any). LPD has no short term borrowing as of February 28, 2010. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $20,000 at the beginning of each month. What is LPD's projected total disbursements for April?

  1. A) $422,918
  2. B) $435,686
  3. C) $398,833
  4. D) $375,655

Answer:  B

Diff: 3      Page Ref: 474-477

Keywords:  Cash Disbursements, Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

36) LPD Logistics, Inc.'s projected sales for the first six months of 2010 are given below.

 

Jan.

$300,000

April

$350,000

Feb.

$350,000

May

$500,000

Mar.

$475,000

June

$400,000

 

20% of sales are collected in the month of the sale, 75% are collected in the month following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of sales. Purchases are made the month prior to the sales and are paid during the month the purchases are made (i.e. goods sold in March are bought and paid for in February). Total other cash expenses are $35,000/month. The company's cash balance as of February 1, 2010 will be $30,000. Excess cash will be used to retire short-term borrowing (if any). LPD has no short term borrowing as of February 28, 2010. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $20,000 at the beginning of each month. What is LPD's projected gross profit for April?

  1. A) ($50,000)
  2. B) $70,000
  3. C) $100,000
  4. D) $110,550

Answer:  B

Diff: 3      Page Ref: 474-477

Keywords:  Cash Budget, Gross Profit

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

37) LPD Logistics, Inc.'s projected sales for the first six months of 2010 are given below.

 

Jan.

$300,000

April

$350,000

Feb.

$350,000

May

$500,000

Mar.

$475,000

June

$400,000

 

20% of sales are collected in the month of the sale, 75% are collected in the month following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of sales. Purchases are made the month prior to the sales and are paid during the month the purchases are made (i.e. goods sold in March are bought and paid for in February). Total other cash expenses are $35,000/month. The company's cash balance as of February 1, 2010 will be $30,000. Excess cash will be used to retire short-term borrowing (if any). LPD has no short term borrowing as of February 28, 2010. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $20,000 at the beginning of each month. What is LPD's projected total receipts (collections) for March?

  1. A) $357,500
  2. B) $310,000
  3. C) $456,000
  4. D) $475,000

Answer:  A

Diff: 3      Page Ref: 474-477

Keywords:  Cash Budget, Cash Receipts

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

38) LPD Logistics, Inc.'s projected sales for the first six months of 2010 are given below.

 

Jan.

$300,000

April

$350,000

Feb.

$350,000

May

$500,000

Mar.

$475,000

June

$400,000

 

20% of sales are collected in the month of the sale, 75% are collected in the month following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of sales. Purchases are made the month prior to the sales and are paid during the month the purchases are made (i.e. goods sold in March are bought and paid for in February). Total other cash expenses are $35,000/month. The company's cash balance as of February 1, 2010 will be $30,000. Excess cash will be used to retire short-term borrowing (if any). LPD has no short term borrowing as of February 28, 2010. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $20,000 at the beginning of each month. What is LPD's projected cumulative borrowing as of March 1, 2010?

  1. A) $110,000
  2. B) $90,000
  3. C) $70,000
  4. D) -0-

Answer:  A

Diff: 3      Page Ref: 474-477

Keywords:  Cash Budget, Cumulative Borrowing

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

39) LPD Logistics, Inc.'s projected sales for the first six months of 2010 are given below.

 

Jan.

$300,000

April

$350,000

Feb.

$350,000

May

$500,000

Mar.

$475,000

June

$400,000

 

20% of sales are collected in the month of the sale, 75% are collected in the month following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of sales. Purchases are made the month prior to the sales and are paid during the month the purchases are made (i.e. goods sold in March are bought and paid for in February). Total other cash expenses are $35,000/month. The company's cash balance as of February 1, 2010 will be $30,000. Excess cash will be used to retire short-term borrowing (if any). LPD has no short term borrowing as of February 28, 2010. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $20,000 at the beginning of each month. What is LPD's projected cash balance as of April 1, 2010?

  1. A) ($48,600)
  2. B) ($58,036)
  3. C) $14,238
  4. D) $21,400

Answer:  A

Diff: 3      Page Ref: 474-477

Keywords:  Cash Budget, Cash Balance

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

40) Which of the following would NOT be found in a cash budget?

  1. A) interest expense
  2. B) taxes
  3. C) depreciation
  4. D) cash sales

Answer:  C

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Depreciation

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

41) Is it possible for the cash budget and the pro forma income statement to have different results?

  1. A) yes, because revenues and expenses included in each statement are different
  2. B) yes, because revenues and expenses are accounted for over different time periods
  3. C) no, because they contain the same variables, while just using different formats
  4. D) no, because the cash budget and the pro forma income statement provide forecasts for the same time period

Answer:  B

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Pro Forma Income Statement

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

42) The cash budget consists of all the following factors EXCEPT

  1. A) cash receipts.
  2. B) cash disbursements.
  3. C) new financing needed.
  4. D) net income.

Answer:  D

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

43) Which of the following items does NOT belong in a cash budget?

  1. A) rent
  2. B) taxes
  3. C) depreciation
  4. D) wages and salaries

Answer:  C

Diff: 1      Page Ref: 474-477

Keywords:  Cash Budget, Depreciation

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

44) In what way does a cash budget provide management with better information about financing requirements than a pro forma balance sheet?

  1. A) A pro forma cash budget gives greater details about the depreciation of fixed assets.
  2. B) A pro forma cash budget not only delineates the financing that is needed but it also pinpoints in greater detail when the financing is needed.
  3. C) A pro forma cash budget utilizes superior methods in determining a firm's income tax liability for the planned period.
  4. D) A pro forma cash budget does not offer better information to management regarding financing than a pro forma balance sheet.

Answer:  B

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Pro Forma Balance Sheet

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

45) A budget

  1. A) records the amount and timing of the firm's past financing needs.
  2. B) provides a basis for taking corrective action in the event that budgeted figures do not match actual or realized figures.
  3. C) remains independent of the human resource performance evaluation task.
  4. D) only makes sense for annual periods of time.

Answer:  B

Diff: 1      Page Ref: 474

Keywords:  Budget

Learning Obj.:  L.O. 14.3

AACSB:  Reflective Thinking

 

46) The treasurer for Chic Man Clothing must decide how much money the company needs to borrow in July. The balance sheet for June 30, 2010 is presented below:

 

                                Chic Man Clothing Balance Sheet

                                                  June 30, 2010

 

Cash

$87,000

 

Accounts payable

$550,000

Marketable securities

123,000

 

Long-term debt

350,000

Accounts receivable

360,000

 

Common stock

130,000

Inventory

300,000

 

Retained earnings

270,000

Total current assets

870,000

 

Total liabilities and stockholders' equity

1,300,000

Fixed assets

430,000

 

 

 

Total assets

$1,300,000

 

 

 

 

The company expects sales of $400,000 for July. The company has observed that 25% of its sales is for cash and that the remaining 75% is collected in the following month. The company plans to purchase $345,000 of new clothing. Usually 70% of purchases is for cash and the remaining 30% of purchases is paid in the following month. Salaries are $135,000 per month, lease payments are $35,000 per month, and depreciation charges are $20,000 per month. The company plans to purchase a new van for $60,000 in July and sell its marketable securities for $123,000. If the company must maintain a minimum cash balance of $25,000, how much money must the company borrow in July?

Answer:  The company needs to borrow $376,500.

 

                                           Chic Man Clothing

                                    Cash Budget for July, 2010

Cash Inflows

 

Reduction in cash to minimum

$62,000

Sale of marketable securities

123,000

Collection of accounts receivable

360,000

Cash sales (.25)($400,000)

100,000

Total cash inflows

$645,000

 

 

Cash Outflows

 

Repayment of accounts payable

$550,000

Cash purchases (.7)(345,000)

241,500

Salaries

135,000

Lease payments

35,000

Purchase of van

60,000

Total cash outflows

$1,021,500

 

 

Net Inflow (Outflows)

($376,500)

 

Diff: 2      Page Ref: 474-477

Keywords:  Cash Budget, Net Change in Cash, Minimum Balance, Short-term Borrowing Needs

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

47) CBD Computer Inc. is attempting to estimate its needs for funds during each of the months covering the third quarter of 20XX. Pertinent information is given below:

 

  1. Past and estimated future sales for 20XX:

       April    $80,000             July                    $90,000

       May        95,000             August             130,000

       June        70,000             September       110,000

                                               October            140,000

  1. Rent expense is $2,500 per month.
  2. A quarterly interest payment on $100,000 in 7% notes payable is to be paid during September, 20XX.
  3. Wages and salaries are estimated as follows:

       July                   $8,000

       August            10,000

       September       12,000

 

Payments are made within the month in which the wages are earned.

  1. Sixty percent of sales are for cash, with the remaining 40% collected in the month following the sale.
  2. CBD pays 80% of the sales price for merchandise and makes payment in the same month in which the sales occur, although purchases are made in the month prior to the anticipated sales.
  3. CBD plans to pay $7,500 in cash for a new forklift truck in July.
  4. Short-term loans can be obtained at the end of each month at 13% annual interest with interest paid during each month for which the loan is outstanding.
  5. CBD's ending cash balance for June 30, 200X is $67,000:

the minimum balance the firm wishes to have in any month is $35,000.

 

Required: Set up a cash budget for CBD for the quarter ended September 30, 20XX.

 

Answer: 

Worksheet

 

 

June

July

 

August

 

September

Sales

$70,000

$90,000

 

$130,000

 

$110,000

Cash sales

 

54,000

 

78,000

 

66,000

Collections (40% 1 month later)

 

28,000

 

36,000

 

52,000

Total cash collection

 

$82,000

 

$114,000

 

$118,000

 

Cash Budget

Cash receipts from sales

 

$82,000

 

$114,000

 

$118,000

Cash disbursements

 

 

 

 

 

 

 

Payments on purchases

 

(72,000)

 

(104,000)

 

(88,000)

 

Rent

 

(2,500)

 

(2,500)

 

(2,500)

 

Wages and salaries

 

(8,000)

 

(10,000)

 

(12,000)

 

Interest (0.07 × 100,000 × 1/4)

 

0

 

(1,750)

 

0

 

Purchase of forklift truck

 

(7,500)

 

 

 

 

Short-term-borrowing interest (0.13)

 

0

 

0

 

0

Total cash disbursement

 

90,000

 

(118,250)

 

(102,500)

 

 

 

 

 

 

 

 

Net

 

(8,000)

 

(4,250)

 

15,500

Beginning cash balance

 

67,000

 

59,000

 

54,750

Borrowing (repayment)

 

0

 

0

 

0

Ending balance

 

$59,000

 

$54,750

 

$70,250

 

Diff: 3      Page Ref: 474-477

Keywords:  Cash Budget

Learning Obj.:  L.O. 14.3

AACSB:  Analytical Thinking

 

 

 

 

 

 

 

 

 

 -----

Key Contents: Financial Management and Corporate Finance
------
Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business, University of Western Ontario
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick, Columbia University
------
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University, Jarrad Harford, University of Washington

-----

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, Virginia Polytechnic Instit. and State University
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
------
Part 1: Fundamental Concepts and Basic Tools of Finance
1. Financial Management
2. Financial Statements
3. The Time Value of Money (Part 1)
4. The Time Value of Money (Part 2)
5. Interest Rates
Part 2: Valuing Stocks and Bonds and Understanding Risk and Return
6. Financial Management Bonds and Bond Valuation
7. Stocks and Stock Valuation
8. Risk and Return
Part 3: Capital Budgeting
9: Capital Budgeting Decision Models
10: Cash Flow Estimation
11: The Cost of Capital
Part 4: Financial Planning and Evaluating Performance
12. Forecasting and Short-Term Financial Planning
13. Working Capital Management
14. Financial Ratios and Firm Performance
Part 5: Other Selected Finance Topics
15. Raising Capital
16. Capital Structure
17. Dividends, Dividend Policy, and Stock Splits
18. International Financial Management
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
------
1. Overview of Financial Management
2. Sizing Up a Business: A Non-Financial Perspective
3. Understanding Financial Statements
4. Measuring Financial Performance
5. Managing Day-To-Day Cash Flow
6. Projecting Financial Requirements and Managing Growth
7. Time Value of Money Basics and Applications
8. Making Investment Decisions
9. Overview of Capital Markets: Long-Term Financing Instruments
10. Assessing the Cost of Capital: What Investors Require
11. Understanding Financing and Payout Decisions
12. Designing an Optimal Capital Structure
13. Measuring and Creating Value
14. Comprehensive Case Study: Wal-Mart Stores, Inc.

1. Overview of Financial Management
• 1.1: Financial Management and the Cash Flow Cycle
• 1.2: The Role of Financial Managers
• 1.3: A Non-Financial Perspective of Financial Management
• 1.4: Financial Management’s Relationship with Accounting and Other Disciplines
• 1.5: Types of Firms
• 1.6: A Financial Management Framework
• 1.7: Relevance for Managers
• 1.8: Summary
• 1.9: Additional Readings
• 1.10: End of Chapter Problems
2. Sizing Up a Business: A Non-Financial Perspective
• 2.1: Sizing Up The Overall Economy
o 2.1.1: GDP Components
o 2.1.2: Sector-Related Fluctuations
o 2.1.3: Inflation and Interest Rates
o 2.1.4: Capital Markets
o 2.1.5: Economic Size-Up Checklist
• 2.2: Sizing Up the Industry
o 2.2.1: Industry Life Cycles
o 2.2.2: The Competitive Environment
o 2.2.3: Opportunities and Risks
o 2.2.4: Industry Size-up Checklist
• 2.3: Sizing Up Operations Management and Supply Risk
• 2.4: Sizing Up Marketing Management and Demand Risk
• 2.5: Sizing Up Human Resource Management and Strategy
• 2.6: Sizing Up Home Depot: An Example
• 2.7: Relevance for Managers
• 2.8 Summary
• 2.9: Additional Readings and Information
• 2.10: End of Chapter Problems
3. Understanding Financial Statements
• 3.1: Understanding Balance Sheets
o 3.1.1: Understanding Assets
o 3.1.2: Understanding Liabilities
o 3.1.3: Understanding Equity
• 3.2: Understanding Income Statements
o 3.2.1: Understanding Revenues, Costs, Expenses, and Profits
o 3.2.2: Connecting a Firm’s Income Statement and Balance Sheet
• 3.3: Understanding Cash Flow Statements
o 3.3.1: Cash Flows Related to Operating Activities
o 3.3.2: Cash Flows from Investing Activities
o 3.3.3: Cash Flows from Financing Activities
• 3.4: Relevance for Managers
• 3.5: Summary
• 3.6: Additional Readings and Sources of Information
• 3.7: End of Chapter Problems
4. Measuring Financial Performance
• 4.1: Performance Measures
o 4.1.1: Return on Equity
o 4.1.2: Profitability Measures
o 4.1.3: Resource Management Measures
o 4.1.4: Liquidity Measures
o 4.1.5: Leverage Measures
o 4.1.6: Application: Home Depot
• 4.2: Reading Annual Reports
• 4.3: Relevance for Managers
• 4.4: Summary
• 4.5: Additional Readings and Sources of Information
• 4.6: End of Chapter Problems
5. Managing Day-To-Day Cash Flow
• 5.1: Cash Flow Cycles
• 5.2: Working Capital Management
o 5.2.1: Managing Inventory
o 5.2.2: Managing Accounts Receivable
o 5.2.3: Managing Accounts Payable
o 5.2.4: Application: Home Depot
• 5.2.4.1: Orange Computers and Little Orange Computers
• 5.2.4.2: Home Depot
• 5.3: Short-Term Financing
o 5.3.1: Bank Loans
o 5.3.2: Commercial Paper
o 5.3.3: Banker’s Acceptance
• 5.4: Relevance for Managers
• 5.5: Summary
• 5.6: Additional Readings
• 5.7: End of Chapter Problems

6. Projecting Financial Requirements and Managing Growth
• 6.1: Generating Pro Forma Income Statements
o 6.1.1: Establishing the Cost of Goods Sold and Gross Profit
o 6.1.2: Establishing Expenses
o 6.1.3: Establishing Earnings
• 6.2: Generating Pro Forma Balance Sheets
o 6.2.1: Establishing Assets
o 6.2.2: Establishing Liabilities and Equity
• 6.3: Generating Pro Forma Cash Budgets
o 6.3.1: Establishing Cash Inflows
o 6.3.2: Establishing Cash Outflows
o 6.3.3: Establishing Net Cash Flows
• 6.4: Performing Sensitivity Analysis
o 6.4.1: Sales Sensitivity
o 6.4.1: Interest Rate Sensitivity
o 6.4.3: Working Capital Sensitivity
• 6.5: Understanding Sustainable Growth and Managing Growth
• 6.6: Relevance for Managers
• 6.7: Summary
• 6.8: Additional Readings and Resources
• 6.9: Problems

7. Time Value of Money Basics and Applications
• 7.1: Exploring Time Value of Money Concepts
o 7.1.1: Future Values
o 7.1.2: Present Values
o 7.1.3: Annuities
o 7.1.4: Perpetuities
• 7.2: Applying Time Value of Money Concepts to Financial Securities
o 7.2.1: Bonds
o 7.2.2: Preferred Shares
o 7.2.3: Common Equity
• 7.3: Relevance for Managers
• 7.4: Summary
• 7.5: Additional Readings
• 7.6: End of Chapter Problems

8. Making Investment Decisions
• 8.1: Understanding the Decision-Making Process
• 8.2: Capital Budgeting Techniques
o 8.2.1: Payback
• 8.2.1.1: Strengths and Weaknesses of the Payback Method
o 8.2.2: Net Present Value
• 8.2.2.1: Strengths and Weaknesses of the Net Present Value Method
o 8.2.3: Internal Rate of Return
• 8.2.3.1: Strengths and Weaknesses of the Internal Rate of Return Method
• 8.2.3.2: Modified Internal Rate of Return
• 8.3: Capital Budgeting Extensions
o 8.3.1: Profitability Index
o 8.3.2: Equivalent Annual Cost and Project Lengths
o 8.3.3: Mutually Exclusive Projects and Capital Rationing
• 8.4: Relevance for Managers
• 8.5: Summary
• 8.6: Additional Readings
• 8.7: End of Chapter Problems

9. Overview of Capital Markets: Long-Term Financing Instruments
• 9.1: Bonds
o 9.1.1: Changing Bond Yields
o 9.1.2: Bond Features
o 9.1.3: Bond Ratings
• 9.2: Preferred Shares
• 9.3: Common Shares
o 9.3.1: Historical Returns
• 9.4: Capital Markets Overview
o 9.4.1: Private versus Public Markets
o 9.4.2: Venture Capital and Private Equity
o 9.4.3: Initial Offerings versus Seasoned Issues
o 9.4.4: Organized Exchanges versus Over-The-Counter Markets
o 9.4.5: Role of Intermediaries
• 9.5: Market Efficiency
o 9.5.1: Weak Form
o 9.5.2: Semi-strong Form
o 9.5.3: Strong Form
o 9.5.4: U.S. Stock Market Efficiency
• 9.6: Relevance for Managers
• Appendix: Understanding Bond and Stock Investment Information
• 9.7: Summary
• 9.8: Additional Readings
• 9.9: End of Chapter Problems

10. Assessing the Cost of Capital: What Investors Require
• 10.1: Understanding the Cost of Capital: An Example
• 10.2: Understanding the Implications of the Cost of Capital
• 10.3: Defining Risk
• 10.4: Estimating the Cost of Debt
• 10.5: Estimating the Cost of Preferred Shares
• 10.6: Estimating the Cost of Equity
o 10.6.1: Dividend Model Approach
o 10.6.2: Capital Asset Pricing Model
• 10.6.2.1: Risk-Free Rate
• 10.6.2.2: Market Risk Premium
• 10.6.2.3: Beta
• 10.7: Estimating Component Weights
• 10.8: Home Depot Application
• 10.9: Hurdle Rates
• 10.10: Relevance for Managers
• 10.11: Summary
• 10.12: Additional Readings
• 10.13: Problems
11. Understanding Financing and Payout Decisions
• 11.1: Capital Structure Overview
• 11.2: Understanding the Modigliani-Miller Argument: Why Capital Structure Does Not Matter
• 11.3: Relaxing the Assumptions: Why Capital Structure Does Matter
o 11.3.1: Understanding the Impact of Corporate Taxes
o 11.3.2: Understanding the Impact of Financial Distress
o 11.3.3: Combining Corporate Taxes and Financial Distress Costs
o 11.3.4: Impact of Asymmetric Information
• 11.4: Understanding Payout Policies
o 11.4.1: Paying Dividends
o 11.4.2: Repurchasing Shares
o 11.4.3: Do Dividend Policies Matter?
• 11.5: Relevance for Managers
• 11.6: Summary
• 11.7: Additional Resources
• 11.8: End of Chapter Problems
• Appendix: Why Dividend Policy Doesn’t Matter: Example

12. Designing an Optimal Capital Structure
• 12.1: Factor Affecting Financing Decisions: The FIRST Approach
o 12.1.1: Maximizing Flexibility
o 12.1.2: Impact on EPS: Minimizing Cost
• 12.1.2.1: A Simple Valuation Model
• 12.1.2.2: Earnings before Interest and Taxes Break-Even: What Leverage Really Means
• 12.1.2.3: Does Issuing Equity Dilute the Value of Existing Shares?
o 12.1.3: Minimizing Risk
o 12.1.4: Maintaining Shareholder Control
o 12.1.5: Optimal Training
• 12.2: Tradeoff Assessment: Evaluating FIRST Criteria
• 12.3: Relevance for Managers
• 12.4: Summary
• 12.5: Additional Resource
• 12.6: End of Chapter Problems

13. Measuring and Creating Value
• 13.1: An Overview of Measuring and Creating Value
• 13.2: Measuring Value: The Book Value Plus Adjustments Method
o 13.2.1: Pros and Cons of the Book Value of Equity Plus Adjustments Method
• 13.3: Measuring Value: The Discount Cash Flow Analysis Method
o 13.3.1: Estimating Free Cash Flows
o 13.3.2: Estimating the Cost of Capital
o 13.3.3: Estimating the Present Value of Free Cash Flows
o 13.3.4: Estimating the Terminal Value
o 13.3.5: Estimating the Value of Equity
o 13.3.6: Pros and Cons of the Free Cash Flow to the Firm Approach
• 13.4: Measuring Value: Relative Valuations and Comparable Analysis
o 13.4.1: The Price-Earnings Method
• 13.4.1.1: Pros and Cons of the Price-Earnings Approach
o 13.4.2: The Enterprise Value-to-EBITDA Method
• 13.4.2.1: Pros and Cons of the EV/EBITDA Approach
• 13.5: Creating Value and Value-Based Management
• 13.6: Valuing Mergers and Acquisitions
o 13.6.1: Valuing Comparable M&A Transactions
• 13.7: Relevance for Managers
• 13.8: Summary
• 13.9: Additional Readings
• 13.10: End of Chapter Problems

14. Comprehensive Case Study: Wal-Mart Stores, Inc.
• 14.1: Sizing Up Wal-Mart
o 14.1.1: Analyzing the Economy
o 14.1.2: Analyzing the Industry
o 14.1.3: Analyzing Walmart’s Strengths and Weaknesses in Operations, Marketing, Management, and Strategy
• 14.1.3.1: Analyzing Walmart’s Operations
• 14.1.3.2: Analyzing Walmart’s Marketing
• 14.1.3.3: Analyzing Walmart’s Management and Strategy
o 14.1.4: Analyzing Walmart’s Financial Health
• 14.2: Projecting Walmart’s Future Performance
o 14.2.1: Projecting Walmart’s Income Statement
o 14.2.2: Projecting Walmart’s Balance Sheet
o 14.2.3: Examining Alternate Scenarios
• 14.3: Assessing Walmart’s Long-Term Investing and Financing
o 14.3.1: Assessing Walmart’s Investments
o 14.3.2: Assessing Walmart’s Capital Raising and the Cost of Capital
• 14.4: Valuing Walmart
o 14.4.1: Measuring Walmart’s Economic Value Added
o 14.4.2: Estimating Walmart’s Intrinsic Value: The DCF Approach
o 14.4.3: Estimating Walmart’s Intrinsic Value: Comparable Analysis
o 14.4.4: Creating Value and Overall Assessment of Walmart
• 14.5: Relevance for Managers and Final Comments
• 14.6: Additional Readings and Sources of Information
• 14.7: End of Chapter Problems
------
Part 1: Introduction to Financial Management
Chapter 1: Getting Started - Principles of Finance
Chapter 2: Firms and the Financial Market
Chapter 3: Understanding Financial Statements, Taxes, and Cash Flows
Chapter 4: Financial Analysis - Sizing Up Firm Performance
Part 2: Valuation of Financial Assets
Chapter 5: Time Value of Money - The Basics
Chapter 6: The Time Value of Money - Annuities and Other Topics
Chapter 7: An Introduction to Risk and Return - History of Financial Market Returns
Chapter 8: Risk and Return - Capital Market Theory
Chapter 9: Debt Valuation and Interest Rates
Chapter 10: Stock Valuation
Part 3: Capital Budgeting
Chapter 11: Investment Decision Criteria
Chapter 12: Analyzing Project Cash Flows
Chapter 13: Risk Analysis and Project Evaluation
Chapter 14: The Cost of Capital
Part 4: Capital Structure & Dividend Policy
Chapter 15: Capital Structure Policy
Chapter 16: Dividend Policy
Part 5: Liquidity Management & Special Topics in Finance
Chapter 17: Financial Forecasting and Planning
Chapter 18: Working Capital Management
Chapter 19: International Business Finance
Chapter 20: Corporate Risk Management
------
PART I: INTRODUCTION TO FOREIGN EXCHANGE MARKETS AND RISKS
Chapter 1: Globalization and the Multinational Corporation
Chapter 2: The Foreign Exchange Market
Chapter 3: Forward Markets and Transaction Exchange Risk
Chapter 4: The Balance of Payments
Chapter 5: Exchange Rate Systems
PART II: INTERNATIONAL PARITY CONDITIONS AND EXCHANGE RATE DETERMINATION
Chapter 6: Interest Rate Parity
Chapter 7: Speculation and Risk in the Foreign Exchange Market
Chapter 8: Purchasing Power Parity and Real Exchange Rates
Chapter 9: Measuring and Managing Real Exchange Risk
Chapter 10: Exchange Rate Determination and Forecasting

PART III: INTERNATIONAL CAPITAL MARKETS
Chapter 11: International Debt Financing
Chapter 12: International Equity Financing
Chapter 13: International Capital Market Equilibrium
Chapter 14: Political and Country Risk

PART IV: INTERNATIONAL CORPORATE FINANCE
Chapter 15: International Capital Budgeting
Chapter 16: Additional Topics in International Capital Budgeting
Chapter 17: Risk Management and the Foreign Currency Hedging Decision
Chapter 18: Financing International Trade
Chapter 19: Managing Net Working Capital

PART V: FOREIGN CURRENCY DERIVATIVES
Chapter 20: Foreign Currency Futures and Options
Chapter 21: Interest Rate and Foreign Currency Swaps
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
PART 7: OPTIONS
20. Financial Options
21. Option Valuation
22. Real Options

PART 8: LONG-TERM FINANCING
23. Raising Equity Capital
24. Debt Financing
25. Leasing
PART 9: SHORT-TERM FINANCING
26. Working Capital Management
27. Short-Term Financial Planning
PART 10: SPECIAL TOPICS
28. Mergers and Acquisitions
29. Corporate Governance
30. Risk Management
31. International Corporate Finance
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
------
------
PART 1 INTRODUCTION
Chapter 1 Corporate Finance and the Financial Manager
Chapter 2 Introduction to Financial Statement Analysis
PART 2 INTEREST RATES AND VALUING CASH FLOWS
Chapter 3 Time Value of Money: An Introduction
Chapter 4 Time Value of Money: Valuing Cash Flow Streams
Chapter 5 Interest Rates
Chapter 6 Bonds
Chapter 7 Stock Valuation
PART 3 VALUATION AND THE FIRM
Chapter 8 Investment Decision Rules
Chapter 9 Fundamentals of Capital Budgeting
Chapter 10 Stock Valuation: A Second Look
PART 4 RISK AND RETURN
Chapter 11 Risk and Return in Capital Markets
Chapter 12 Systematic Risk and the Equity Risk Premium
Chapter 13 The Cost of Capital
PART 5 LONG-TERM FINANCING
Chapter 14 Raising Equity Capital
Chapter 15 Debt Financing
PART 6 CAPITAL STRUCTURE AND PAYOUT POLICY
Chapter 16 Capital Structure
Chapter 17 Payout Policy
PART 7 FINANCIAL PLANNING AND FORECASTING
Chapter 18 Financial Modeling and Pro Forma Analysis
Chapter 19 Working Capital Management
Chapter 20 Short-Term Financial Planning
PART 8 Special Topics
Chapter 21 Option Applications and Corporate Finance
Chapter 22 Mergers and Acquisitions
Chapter 23 International Corporate Finance  

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FINANCIAL MANAGEMENT AND CORPORATE FINANCE - COLLECTION 2017 (FREE DOWNLOAD)

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Free download - PPT - Link
Free donwload - PPT - Link


Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business
Free download - PPT - Link

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick
Free download - PPT 1 - Link
Free download - PPT 2 - Link

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Free download - PPT 1 - Link
Free download - PPT 2 - Link
Free download - PPT 3 - Link

Free download Link - Core 4

Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, 
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown

 

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Free download - PPT  - Link


Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Free download - PPT  - Link


Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Free download - PPT  - Link


Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, 
Free download - PPT  - Link


Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Free download - PPT  - Link


Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
 Free download - PPT  - Link

 

DOWNLOAD ALL TEST BANKs & CASE STUDY GUIDES - 2017

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University - Test bank

Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business - Test bank

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University - Test bank

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick - Test bank

Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown - Test bank

Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo - Test bank

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017 - Test bank

Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016 - Test bank

Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University - Test bank

Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown - Test bank

Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin - Test bank

Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter - Test bank

 

------

For Test Bankz, Quiz Answers and Case study Guides, email to: This email address is being protected from spambots. You need JavaScript enabled to view it.

All Free downloads - LINK

 

Good Luck and Success, Enjoy Your Study !

 

 

 

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