Question 1

Which of the following mathematical expressions is true if the net operating income of a firm is equal to zero?

Accepted Answer

A)  Sales = Gross profit margin 
B)  Sales = Total variable costs + Total fixed costs 
C)  Total operating costs = Total variable costs + Total fixed costs 
D)  Total operating costs = Contribution margin 
E)  Contribution margin = Earnings before interest and tax 
A)  Sales = Gross profit margin 
B)  Sales = Total variable costs + Total fixed costs 
C)  Total operating costs = Total variable costs + Total fixed costs 
D)  Total operating costs = Contribution margin 
E)  Contribution margin = Earnings before interest and tax B

Question 2

If a firm does not meet its forecasted sales level, leverage will result in a magnified loss in income compared to what is expected. This will occur because production facilities might not be expanded appropriately.

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following statements is true of operating breakeven analysis?

Accepted Answer

A)  It involves determining the level of production and sales at which net operating income is equal to one. 
B)  It involves determining the point at which revenue from sales equals operating costs. 
C)  It involves the analysis of the level of production and sales at which financing costs are recovered. 
D)  It involves determining the operating income the firm needs to just cover all of its financing costs. 
E)  It involves the analysis of the interest payments to bondholders and the dividend payments to preferred stockholders. 
A)  It involves determining the level of production and sales at which net operating income is equal to one. 
B)  It involves determining the point at which revenue from sales equals operating costs. 
C)  It involves the analysis of the level of production and sales at which financing costs are recovered. 
D)  It involves determining the operating income the firm needs to just cover all of its financing costs. 
E)  It involves the analysis of the interest payments to bondholders and the dividend payments to preferred stockholders. B

Question 4

To fully account for financing feedbacks, all steps in the projected balance sheet method should be repeated until _____.

Accepted Answer

A)  the financing feedbacks equal zero 
B)  the spontaneously generated funds equal one 
C)  the additional funds needed equal zero 
D)  the degree of financial leverage equals one 
E)  the revenue equals the expenses 
A)  the financing feedbacks equal zero 
B)  the spontaneously generated funds equal one 
C)  the additional funds needed equal zero 
D)  the degree of financial leverage equals one 
E)  the revenue equals the expenses

Question 5

A firm needs external financing to support increases in operations if:

Accepted Answer

A)  the firm is operating at full capacity. 
B)  the firm is accounting for a very less amount of financing feedbacks. 
C)  the firm has a large amount of spontaneously generated funds. 
D)  the firm is having economies of scale. 
E)  the firm is operating at the breakeven point. 
A)  the firm is operating at full capacity. 
B)  the firm is accounting for a very less amount of financing feedbacks. 
C)  the firm has a large amount of spontaneously generated funds. 
D)  the firm is having economies of scale. 
E)  the firm is operating at the breakeven point.

Question 6

Operating breakeven analysis determines:

Accepted Answer

A)  the minimum value of assets that a firm should hold to achieve profitability. 
B)  the maximum amount of the total assets to be financed by debt. 
C)  the minimum earnings to be retained and the earnings to be paid as dividends. 
D)  the level of capacity utilization required to achieve the forecasted sales level. 
E)  the level of sales of a new product required to achieve profitability. 
A)  the minimum value of assets that a firm should hold to achieve profitability. 
B)  the maximum amount of the total assets to be financed by debt. 
C)  the minimum earnings to be retained and the earnings to be paid as dividends. 
D)  the level of capacity utilization required to achieve the forecasted sales level. 
E)  the level of sales of a new product required to achieve profitability.

Question 7

Marcus Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its variable costs are approximately 30% of sales, and its fixed operating costs amount to 50% of revenues at its current output level. Although fixed costs are based on revenues at the current output level, the cost level is fixed. Which of the following is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?

Accepted Answer

A)  1.0× 
B)  2.2× 
C)  3.5× 
D)  4.0× 
E)  5.0× 
A)  1.0× 
B)  2.2× 
C)  3.5× 
D)  4.0× 
E)  5.0×

Question 8

Which of the following is true of the degree of operating leverage (DOL)?

Accepted Answer

A)  The higher the DOL, the closer the firm is to its financial breakeven point. 
B)  The higher the DOL, the lower the financial risk of the firm. 
C)  The lower the DOL, the higher the operating risk of the firm. 
D)  The higher the DOL, the closer the firm is to its operating breakeven point. 
E)  The higher the DOL, the higher the percentage increase in the sales. 
A)  The higher the DOL, the closer the firm is to its financial breakeven point. 
B)  The higher the DOL, the lower the financial risk of the firm. 
C)  The lower the DOL, the higher the operating risk of the firm. 
D)  The higher the DOL, the closer the firm is to its operating breakeven point. 
E)  The higher the DOL, the higher the percentage increase in the sales.

Question 9

Which of the following accounts remains the same even with an increase in sales?

Accepted Answer

A)  Accounts payable 
B)  Notes payable 
C)  Accrued taxes 
D)  Accounts receivable 
E)  Accrued wages 
A)  Accounts payable 
B)  Notes payable 
C)  Accrued taxes 
D)  Accounts receivable 
E)  Accrued wages

Question 10

Managements need not consider economies of scale in operations when constructing pro forma financial statements since economies of scale do not impact financial statements.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is true of the degree of total leverage (DTL)?

Accepted Answer

A)  It is the percentage change in EPS that results from a given percentage change in EBIT. 
B)  It is the level of EBIT at which EPS equals zero. 
C)  It is the percentage change in NOI (or EBIT) associated with a given percentage change in sales. 
D)  It represents the level of production and sales at which net operating income is zero. 
E)  It is the percentage change in EPS that results from a 1 percent change in sales. 
A)  It is the percentage change in EPS that results from a given percentage change in EBIT. 
B)  It is the level of EBIT at which EPS equals zero. 
C)  It is the percentage change in NOI (or EBIT) associated with a given percentage change in sales. 
D)  It represents the level of production and sales at which net operating income is zero. 
E)  It is the percentage change in EPS that results from a 1 percent change in sales.

Question 12

Which of the following accurately describes financing feedbacks?

Accepted Answer

A)  Funds that a firm must raise externally through new borrowing or by selling new stock. 
B)  A method of forecasting financial requirements based on forecasted financial statements. 
C)  A forecast of a firm's unit and dollar sales generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, and so forth. 
D)  The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets. 
E)  The projection of sales, income, and assets, as well as the determination of the resources needed to achieve these projections. 
A)  Funds that a firm must raise externally through new borrowing or by selling new stock. 
B)  A method of forecasting financial requirements based on forecasted financial statements. 
C)  A forecast of a firm's unit and dollar sales generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, and so forth. 
D)  The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets. 
E)  The projection of sales, income, and assets, as well as the determination of the resources needed to achieve these projections.

Question 13

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

Accepted Answer

A) True 
 B)False

Question 14

According to the forecasting and control function, if a firm cannot obtain the funds required to meet the sales forecast, then it should _____.

Accepted Answer

A)  plan for the acquisition of required funds well in advance 
B)  scale back the projected level of operations 
C)  expand its production facilities 
D)  build up its inventory quickly 
E)  reformulate its plans to increase retained earnings 
A)  plan for the acquisition of required funds well in advance 
B)  scale back the projected level of operations 
C)  expand its production facilities 
D)  build up its inventory quickly 
E)  reformulate its plans to increase retained earnings

Question 15

A firm must pay _____ costs even if it produces and sells nothing.

Accepted Answer

A)  variable 
B)  lumpy 
C)  direct labor 
D)  fixed 
E)  breakeven 
A)  variable 
B)  lumpy 
C)  direct labor 
D)  fixed 
E)  breakeven

Question 16

Azure Inc. has sales of $4,500 million, and it uses only 80 percent of its plant capacity. It can increase its sales to _____ without having to increase its plant and equipment.

Accepted Answer

A)  $2,530 million 
B)  $4,125 million 
C)  $5,625 million 
D)  $6,150 million 
E)  $7,035 million 
A)  $2,530 million 
B)  $4,125 million 
C)  $5,625 million 
D)  $6,150 million 
E)  $7,035 million

Question 17

If a firm has a degree of operating leverage (DOL) that is greater than 1.0, then it means that a 1.0 percent change in _____ will cause a change in earnings before interest and taxes (EBIT) that is _____ 1.0 percent.

Accepted Answer

A)  earnings per share; greater than 
B)  net income; greater than 
C)  net operating income; less than 
D)  sales; greater than 
E)  fixed costs; less than 
A)  earnings per share; greater than 
B)  net income; greater than 
C)  net operating income; less than 
D)  sales; greater than 
E)  fixed costs; less than

Question 18

Lumpy assets do not have an impact on the financial requirements associated with the expansion of the firm.

Accepted Answer

A) True 
 B)False

Question 19

A firm projects a small increase in sales, but still requires a significant increase in plant and equipment. Which of the following is a reason for such a large financial commitment?

Accepted Answer

A)  Decrease in economies of scale 
B)  Increase in fixed operating costs 
C)  Decrease in financing feedbacks 
D)  Increase in lumpy assets 
E)  Decrease in spontaneously generated funds 
A)  Decrease in economies of scale 
B)  Increase in fixed operating costs 
C)  Decrease in financing feedbacks 
D)  Increase in lumpy assets 
E)  Decrease in spontaneously generated funds

Question 20

Excess capacity means more external financing is required to support increases in operations than would be needed if a firm previously operated at full capacity.

Accepted Answer

A) True 
 B)False

Which of the following mathematical expressions is true if the net operating income of a firm is equal to zero?

If a firm does not meet its forecasted sales level, leverage will result in a magnified loss in income compared to what is expected. This will occur because production facilities might not be expanded appropriately.

Which of the following statements is true of operating breakeven analysis?

To fully account for financing feedbacks, all steps in the projected balance sheet method should be repeated until _____.

A firm needs external financing to support increases in operations if:

Operating breakeven analysis determines:

Which of the following is true of the degree of operating leverage (DOL)?

Which of the following accounts remains the same even with an increase in sales?

Managements need not consider economies of scale in operations when constructing pro forma financial statements since economies of scale do not impact financial statements.

Which of the following is true of the degree of total leverage (DTL)?

Which of the following accurately describes financing feedbacks?

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

According to the forecasting and control function, if a firm cannot obtain the funds required to meet the sales forecast, then it should _____.

A firm must pay _____ costs even if it produces and sells nothing.

Azure Inc. has sales of $4,500 million, and it uses only 80 percent of its plant capacity. It can increase its sales to _____ without having to increase its plant and equipment.

If a firm has a degree of operating leverage (DOL) that is greater than 1.0, then it means that a 1.0 percent change in _ will cause a change in earnings before interest and taxes (EBIT) that is _ 1.0 percent.

Lumpy assets do not have an impact on the financial requirements associated with the expansion of the firm.

A firm projects a small increase in sales, but still requires a significant increase in plant and equipment. Which of the following is a reason for such a large financial commitment?

Excess capacity means more external financing is required to support increases in operations than would be needed if a firm previously operated at full capacity.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Filters

Exam 16: Financial Planning and Control

Which of the following mathematical expressions is true if the net operating income of a firm is equal to zero?

If a firm does not meet its forecasted sales level, leverage will result in a magnified loss in income compared to what is expected. This will occur because production facilities might not be expanded appropriately.

Which of the following statements is true of operating breakeven analysis?

To fully account for financing feedbacks, all steps in the projected balance sheet method should be repeated until _____.

A firm needs external financing to support increases in operations if:

Operating breakeven analysis determines:

Which of the following is true of the degree of operating leverage (DOL)?

Which of the following accounts remains the same even with an increase in sales?

Managements need not consider economies of scale in operations when constructing pro forma financial statements since economies of scale do not impact financial statements.

Which of the following is true of the degree of total leverage (DTL)?

Which of the following accurately describes financing feedbacks?

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

According to the forecasting and control function, if a firm cannot obtain the funds required to meet the sales forecast, then it should _____.

A firm must pay _____ costs even if it produces and sells nothing.

Azure Inc. has sales of $4,500 million, and it uses only 80 percent of its plant capacity. It can increase its sales to _____ without having to increase its plant and equipment.

If a firm has a degree of operating leverage (DOL) that is greater than 1.0, then it means that a 1.0 percent change in _____ will cause a change in earnings before interest and taxes (EBIT) that is _____ 1.0 percent.

Lumpy assets do not have an impact on the financial requirements associated with the expansion of the firm.

A firm projects a small increase in sales, but still requires a significant increase in plant and equipment. Which of the following is a reason for such a large financial commitment?

Excess capacity means more external financing is required to support increases in operations than would be needed if a firm previously operated at full capacity.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Filters

If a firm has a degree of operating leverage (DOL) that is greater than 1.0, then it means that a 1.0 percent change in _ will cause a change in earnings before interest and taxes (EBIT) that is _ 1.0 percent.