nan Financial Planning Test Questions & Answers Ch.29

Principles of Corporate Finance, 13e (Brealey)

Chapter 29 Financial Planning

1) Short-term financial decisions

A) involve short-lived assets.

B) involve short-lived liabilities.

C) are easily reversed.

D) involve short-lived assets, involve short-lived liabilities, and are easily reversed.

2) The main difference between short-term and long-term finance is

A) the risk of long-term cash flows is more important than short-term risks.

B) long-term cash flows have greater present values than short-term cash flows.

C) short-term cash flows occur within a year or less.

D) All of these answers are correct.

3) A firm can meet its cumulative capital requirement via

A) long-term financing.

B) short-term financing.

C) long-term financing and short-term financing.

D) None of these answers are correct.

4) A firm that chooses Strategy A, as portrayed in Chapter 29, should plan to

A) maintain a high ratio of current assets to sales.

B) use high levels of short-term debt and low levels of long-term financing.

C) decrease its dividend soon.

D) have surplus cash that can be invested in short-term securities.

5) A firm that chooses Strategy B, as portrayed in Chapter 29, should plan to

A) maintain a high ratio of current assets to sales.

B) use low or no short-term debt and more long-term financing.

C) repurchase a substantial number of shares.

D) be a short-term lender during a part of the year and a borrower during the rest.

6) A firm that chooses Strategy C, as portrayed in Chapter 29, should plan to

A) have a permanent need for short-term borrowing.

B) have high current cash holdings.

C) use low or no short-term debt and more long-term financing.

D) increase its dividend soon.

7) Which of the following assets is the least liquid?

A) Equipment and machinery

B) Finished goods inventory

C) Accounts receivable

D) Marketable securities

8) Arrange the following assets in decreasing order of liquidity, i.e., the most liquid should be listed first.

I) equipment and machinery;

II) inventories;

III) accounts receivable;

IV) marketable securities

A) I, II, III, and IV

B) II, III, IV, and I

C) III, IV, II, and I

D) IV, III, II, and I

9) Assume the following data: Total current assets = $852; Total current liabilities = $406; Long-term debt = $442. Calculate net working capital.

A) $446

B) $852

C) $410

D) $4

10) Net working capital is defined as

A) the current assets in a business.

B) the difference between current assets and current liabilities.

C) the present value of all short-term cash flows.

D) the difference between total assets and total liabilities.

11) The cash cycle occurs in the following sequence:

A) cash, raw materials, finished goods, receivables, and cash.

B) cash, receivables, finished goods, raw materials, and cash.

C) cash, raw materials, receivables, finished goods, and cash.

D) cash, finished goods, receivables, raw materials, and cash.

12) The cash budget is the primary short-term financial planning tool. The key reason(s) that a treasurer creates a cash budget is (are)

I) to estimate the firm's investment in assets;

II) to estimate the size and timing of the firm's new cash flows;

III) to prepare for potential financing needs

A) I only

B) II and III only

C) II only

D) III only

13) A cash-flow statement categorizes cash flows into which three general categories?

A) Working capital, short-term cash flows, and long-term cash flows.

B) Operating activities, investing activities, and financing activities.

C) Cash accounts, bank accounts, and transfer accounts.

D) Inventory, accounts receivable, and accounts payable.

14) A company has forecast sales in the first three months of the year as follows (figures in millions): January, $60; February, $80; March, $100. 60 percent of sales are usually paid for in the month that they take place and 40 percent in the following month. Receivables at the end of December were $24 million. What are the forecasted collections on accounts receivable in March?

A) $88 million

B) $92 million

C) $100 million

D) $140 million

15) A company has forecast sales in the first three months of the year as follows (figures in millions): January, $90; February, $20; March, $30. 70 percent of sales are usually paid for in the month that they take place and 30 percent in the following month. Receivables at the end of December were $20 million. What are the forecasted collections on accounts receivable in March?

A) $27 million

B) $50 million

C) $23 million

D) $35 million

16) The following is the general formula for calculating the "Ending accounts receivable (AR)":

A) Ending (AR) = beginning (AR) − sales + collections.

B) Ending (AR) = beginning (AR) + sales − collections.

C) Ending (AR) = beginning (AR) + sales + collections.

D) Ending (AR) = beginning (AR) − sales − collections.

17) A company has forecast sales in the first three months of the year as follows (figures in millions): January, $80; February, $60; March, $40. 70 percent of sales are usually paid for in the month that they take place, 20 percent in the following month, and the final 10 percent in the month after that. Receivables at the end of December were $23 million. What are the forecasted collections on accounts receivable in March?

A) $180 million

B) $13 million

C) $40 million

D) $48 million

18) A company has forecast sales in the first three months of the year as follows (figures in millions): January, $200; February, $140; March, $100. 50 percent of sales are usually paid for in the month that they take place, 30 percent in the following month, and the final 20 percent in the month after that. Receivables at the end of December were $100 million. What are the forecasted collections on accounts receivable in March?

A) $132 million

B) $100 million

C) $240 million

D) $92 million

19) The first step in the preparation of a cash budget is

A) calculating appropriate financial ratios.

B) preparing a sales forecast.

C) determining the firm's dividend policy.

D) determining long-term capital structure.

20) Cash inflow, in cash budgeting, comes mainly from

A) collections on accounts receivable.

B) short-term debt.

C) issue of securities.

D) sale of seasoned equity.

21) In cash budgeting, which of the following is a cash outflow?

A) Sales

B) Collections on accounts receivable

C) Payments on accounts payable

D) Issuance of equity

22) The most important function of a short-term financial plan is

A) to develop a cash budget.

B) to cover the forecasted requirements in the most economical way possible.

C) to help develop the long-term financial plan.

D) None of these answers are correct.

23) Short-term financial plan models are offered by

I) banks;

II) accounting firms;

III) management consultants;

IV) specialized computer software firms

A) I only.

B) I and II only.

C) I, II, and III only

D) I, II, III, and IV.

24) Short-term financial plans are developed using the following methods:

A) trial and error.

B) trial and error and simulation programs.

C) simulation programs and optimization models.

D) trial and error, simulation programs, and optimization models.

25) When firms prepare a financial plan, they use the following:

A) Guessing simulations.

B) Guessing simulations and sensitivity analysis.

C) Guessing simulations, sensitivity analysis, and scenario analysis.

D) Sensitivity analysis and scenario analysis.

26) The basic relationship for determining external capital required is

A) External capital required = − operating cash flow + investment in net working capital.

B) External capital required = − operating cash flow + investment in net working capital + investment in fixed assets.

C) External capital required = − operating cash flow + investment in net working capital + investment in fixed assets + dividends.

D) None of these answers are correct.

27) Among models used to develop a financial plan, the following is the simplest:

A) percentage of sales model.

B) regression model.

C) computer simulation model.

D) optimization model.

28) The firm's internal growth rate is defined as

A) retained earnings/net income.

B) reinvested earnings/net assets.

C) retained earnings/total assets.

D) net income/net assets.

29) The internal growth rate equals

A) plowback ratio × profit margin.

B) plowback ratio × return on equity.

C) plowback ratio × return on equity × [equity/net assets].

D) None of these answers are correct.

30) Assume the following data: Plowback ratio = 50 percent; Return on equity = 20 percent; Equity to net assets ratio = 60 percent. Calculate the internal growth rate for the firm.

A) 6 percent

B) 10 percent

C) 12 percent

D) 17 percent

31) A firm can achieve a higher growth rate (within limits) without raising external capital by

A) increasing the proportion of debt in its capital structure.

B) increasing its current ratio.

C) decreasing its inventory turnover.

D) increasing its plowback ratio.

32) The sustainable growth rate equals

A) plowback ratio × return on equity.

B) return on equity/plowback ratio.

C) return on assets × plowback ratio.

D) plowback ratio × return on equity × (equity/net assets).

33) Last year Axle Inc. reported net assets of $400, equity of $200, net income of $50, dividends of $10, and earnings retained in the period of $40. What is Axle Inc.'s internal growth rate?

A) 10.0 percent

B) 57.1 percent

C) 20.0 percent

D) 71.4 percent

34) Last year Axle Inc. reported total assets of $400, equity of $200, net income of $50, dividends of $10, and earnings retained in the period of $40. What is Axle Inc.'s sustainable growth rate?

A) 25.0 percent

B) 57.1 percent

C) 20.0 percent

D) 71.4 percent

35) Last year Foley Inc. reported total assets of $500, equity of $400, net income of $100, dividends of $50, and earnings retained in the period of $50. What is Foley Inc.'s sustainable growth rate?

A) 17.5 percent

B) 30.0 percent

C) 10.0 percent

D) 12.5 percent

36) Last year Foley Inc. reported net fixed assets of $400, net working capital of $100, net income of $120, dividends of $70, and earnings retained in the period of $50. What is Foley Inc.'s internal growth rate?

A) 17.5 percent

B) 30.0 percent

C) 10.0 percent

D) 12.5 percent

37) Short-term financial decisions are conceptually easier to make than long-term decisions.

38) Strategy A, as portrayed in Chapter 29, implies a permanent need for short-term borrowing.

39) Strategy C, as portrayed in Chapter 29, implies a short-term cash surplus.

40) Strategy B, as portrayed in Chapter 29, implies that the firm is a short-term lender during a part of the year and a short-term borrower during the rest of the year.

41) Most firms make a permanent investment in net working capital.

42) A taxpaying firm with excess cash can at best generate zero NPV for shareholders by investing in marketable securities.

43) The main source of cash in a cash budget is collections on accounts receivable.

44) Depreciation is not included as a source of cash because it is an expense.

45) Two common sources of short-term financing are borrowing from a bank and stretching payables.

46) The term short-term planning usually indicates planning for the next 12 months.

47) Sales forecasts are the typical starting point for financial planning.

48) Small companies in relatively high-risk industries are more likely to hold large cash surpluses.

49) A problem with the percentage of sales method is that some variables are relatively insensitive to sales. The percentage of sales method will therefore, in a growing company, overstate such values.

50) The growth rate that a company can achieve using external funds is called the internal growth rate.

51) How do firms finance investments in current assets?

52) Define net working capital.

53) Briefly describe the cash cycle.

54) Discuss the reasons why a company should prepare a cash budget.

55) Discuss the process of preparing a short-term financial plan.

56) Discuss the process of preparing a financial plan.

57) Which model do firms typically use to prepare a pro-forma long-term financial plan?

58) How does one calculate external capital required?

59) Briefly discuss some of the problems associated with the use of the percentage of sales model.