Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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.

Accepted Answer

A) 6 percent 
B) 10 percent 
C) 12 percent 
D) 17 percent 
A) 6 percent 
B) 10 percent 
C) 12 percent 
D) 17 percent A

Question 3

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.

Accepted Answer

A) True 
 B)False  True

Question 4

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

Accepted Answer

A) Sales 
B) Collections on accounts receivable 
C) Payments on accounts payable 
D) Issuance of equity 
A) Sales 
B) Collections on accounts receivable 
C) Payments on accounts payable 
D) Issuance of equity

Question 5

Sales forecasts are the typical starting point for financial planning.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

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. 
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.

Question 8

Define net working capital.

Accepted Answer

Net working capital

Question 9

How do firms finance investments in current assets?

Accepted Answer

Firms typically finance invest

Question 10

The basic relationship for determining external capital required is

Accepted Answer

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. 
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.

Question 11

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

Accepted Answer

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. 
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.

Question 12

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?

Accepted Answer

A) 17.5 percent 
B) 30.0 percent 
C) 10.0 percent 
D) 12.5 percent 
A) 17.5 percent 
B) 30.0 percent 
C) 10.0 percent 
D) 12.5 percent

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

The first step in the preparation of a cash budget is

Accepted Answer

A) calculating appropriate financial ratios. 
B) preparing a sales forecast. 
C) determining the firm's dividend policy. 
D) determining long-term capital structure. 
A) calculating appropriate financial ratios. 
B) preparing a sales forecast. 
C) determining the firm's dividend policy. 
D) determining long-term capital structure.

Question 16

Which of the following assets is the least liquid?

Accepted Answer

A) Equipment and machinery 
B) Finished goods inventory 
C) Accounts receivable 
D) Marketable securities 
A) Equipment and machinery 
B) Finished goods inventory 
C) Accounts receivable 
D) Marketable securities

Question 17

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

Accepted Answer

A short-term financial plan is generally

Question 18

The cash cycle occurs in the following sequence:

Accepted Answer

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. 
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.

Question 19

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

Accepted Answer

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. 
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.

Question 20

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?

Accepted Answer

A) $180 million 
B) $13 million 
C) $40 million 
D) $48 million 
A) $180 million 
B) $13 million 
C) $40 million 
D) $48 million

Exam 29: Financial Planning

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

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 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.

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

Sales forecasts are the typical starting point for financial planning.

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

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

Define net working capital.

How do firms finance investments in current assets?

The basic relationship for determining external capital required is

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

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?

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

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

The first step in the preparation of a cash budget is

Which of the following assets is the least liquid?

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

The cash cycle occurs in the following sequence:

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

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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