Question 1

Which of the following statements is correct?

Accepted Answer

A)  The first pass using the projected balance sheet method determines the financing feedback effects and determines how much in additional funds are needed.The second pass completes the cycle,identifies the full financing need,and eliminates further feedback effects. 
B)  Interest expense on additional new debt is the only income statement account affected by financing feedback,and dividends payable to new common stock is the only balance sheet account affected. 
C)  The projected balance sheet method is useful for determining additional funds needed,however,it cannot be used in evaluating dividend policy and capital structure decisions. 
D)  One reason a firm's managers may choose to meet additional funds needed requirements through common stock is that it involves no financing feedback effects.Since no new debt is used,interest expense will be considered fully in the first pass,the income statement will remain unchanged,and no second pass is needed. 
E)  If new debt and new stock are used to meet new financing needs,net income will decrease from the first pass to the second pass even though taxes decrease.In addition,if dividends are to be paid on new stock,this will further decrease the amount of retained earnings available for financing needs. 
A)  The first pass using the projected balance sheet method determines the financing feedback effects and determines how much in additional funds are needed.The second pass completes the cycle,identifies the full financing need,and eliminates further feedback effects. 
B)  Interest expense on additional new debt is the only income statement account affected by financing feedback,and dividends payable to new common stock is the only balance sheet account affected. 
C)  The projected balance sheet method is useful for determining additional funds needed,however,it cannot be used in evaluating dividend policy and capital structure decisions. 
D)  One reason a firm's managers may choose to meet additional funds needed requirements through common stock is that it involves no financing feedback effects.Since no new debt is used,interest expense will be considered fully in the first pass,the income statement will remain unchanged,and no second pass is needed. 
E)  If new debt and new stock are used to meet new financing needs,net income will decrease from the first pass to the second pass even though taxes decrease.In addition,if dividends are to be paid on new stock,this will further decrease the amount of retained earnings available for financing needs. E

Question 2

-Refer to Trident Food Corporation.What is the operating breakeven point in sales units (Q)for Trident Foods?

Accepted Answer

A)  7,500 
B)  5,625 
C)  6,825 
D)  4,800 
E)  2,700 
A)  7,500 
B)  5,625 
C)  6,825 
D)  4,800 
E)  2,700 D

Question 3

Breakeven analysis is the method of determining the point at which sales will just cover ____ costs.

Accepted Answer

A)  labor 
B)  inventory 
C)  operating 
D)  financing 
A)  labor 
B)  inventory 
C)  operating 
D)  financing C

Question 4

Financial control involves a feedback and adjustment process that (1)ensures that existing plans are followed,or (2)modifies existing plans in response to changes in the firm's operating environment.

Accepted Answer

A) True 
 B)False

Question 5

Any firm with a positive growth rate in sales will require some amount of external funding,assuming all existing ratios are to be maintained.

Accepted Answer

A) True 
 B)False

Question 6

If a small change in sales results in a large change in EPS,then it must be caused by the financial leverage associated with the firm.

Accepted Answer

A) True 
 B)False

Question 7

Two firms that have the same financial leverage must also have the same ROE,because both financial leverage and ROE measure the risk associated with equity financing.

Accepted Answer

A) True 
 B)False

Question 8

The degree of operating leverage has which of the following characteristics?

Accepted Answer

A)  The closer the firm is operating to breakeven quantity,the smaller the DOL. 
B)  A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output,other things held constant. 
C)  The DOL is not a fixed number for a given firm,but will depend upon the time zero values of the economic variables Q (Quantity),P (Price),and V (Volume). 
D)  The DOL relates the change in net income to the change in net operating income. 
E)  If the firm has no debt,the DOL will equal 1. 
A)  The closer the firm is operating to breakeven quantity,the smaller the DOL. 
B)  A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output,other things held constant. 
C)  The DOL is not a fixed number for a given firm,but will depend upon the time zero values of the economic variables Q (Quantity),P (Price),and V (Volume). 
D)  The DOL relates the change in net income to the change in net operating income. 
E)  If the firm has no debt,the DOL will equal 1.

Question 9

The degree of financial leverage for ABC Inc.is 2.5,and the degree of financial leverage for XYZ Corporation is 1.5.According to this information,which firm is considered to have greater financial risk?

Accepted Answer

A)  ABC Inc. 
B)  XYZ Corporation. 
C)  The degree of financial leverage is not a measure of financial risk,so it is not possible to tell which firm has the greater financial risk given the above information. 
D)  To determine which firm has the greater financial risk,we need to know the operating income (NOI or EBIT)of each firm.XYZ Corporation would have less financial risk if its operating income is at least twice that of ABC Inc. 
E)  None of the above is a correct answer. 
A)  ABC Inc. 
B)  XYZ Corporation. 
C)  The degree of financial leverage is not a measure of financial risk,so it is not possible to tell which firm has the greater financial risk given the above information. 
D)  To determine which firm has the greater financial risk,we need to know the operating income (NOI or EBIT)of each firm.XYZ Corporation would have less financial risk if its operating income is at least twice that of ABC Inc. 
E)  None of the above is a correct answer.

Question 10

The projected balance sheet method assumes that the key ratios are constant,which means,for example,that if you plotted a graph of inventories versus sales,the regression line would be linear and would have a positive Y-intercept.

Accepted Answer

A) True 
 B)False

Question 11

Other things held constant,a high degree of operating leverage will mean that a relatively small change in sales will result in a large change in operating income.

Accepted Answer

A) True 
 B)False

Question 12

The fact that long-term debt and equity funds are raised infrequently and in large amounts lessens the need for the firm to forecast them on a continual basis.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following liabilities increase typically and create spontaneously generated funds as sales increase for the firm?

Accepted Answer

A)  Long-term debt 
B)  Accrued wages 
C)  Accounts receivable 
D)  Property,plant,and equipment 
A)  Long-term debt 
B)  Accrued wages 
C)  Accounts receivable 
D)  Property,plant,and equipment

Question 14

The operating breakeven volume in units can be found by dividing the firm's total fixed cost in dollars by its profit margin per unit (i.e. ,price less variable cost).

Accepted Answer

A) True 
 B)False

Question 15

At the firm's operating breakeven point,total revenues and total variable costs are exactly equal.

Accepted Answer

A) True 
 B)False

Question 16

JT Inc.produces gourmet frozen dinners for the airline industry.JT has fixed costs of $200,000 and variable costs of $8 per frozen dinner.The selling price per frozen dinner is $13 and JT plans to sell 150,000 frozen dinners this year.If JT sells the 150,000 frozen dinners they planned to sell what will JT's operating profit be this year?

Accepted Answer

A)  $1,950,000 
B)  $1,750,000 
C)  $750,000 
D)  $550,000 
E)  $1,000,000 
A)  $1,950,000 
B)  $1,750,000 
C)  $750,000 
D)  $550,000 
E)  $1,000,000

Question 17

The higher the DOL,the greater the firm's use of debt and the more earnings will change following a change in sales.

Accepted Answer

A) True 
 B)False

Question 18

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on uniform cash receipts and disbursements,but actual receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 19

A firm has the following balance sheet:
Cash:$ 20
Accounts payable:$ 20
Accounts receivable:20
Notes payable:40
Inventory:20
Long-term debt:80
Fixed assets:180
Common stock:80
Retained earnings:20
Total assets:$240
Total liabilities and equity:$240
Sales for the year just ended were $400,and fixed assets were used at 80 percent of capacity,but its current assets were at optimal levels.Sales are expected to grow by 5 percent next year,the profit margin is 5 percent,and the dividend payout ratio is 60 percent.How much additional funds (AFN)will be needed?

Accepted Answer

A)  $4.6 
B)  −$6.4 (Surplus) 
C)  $2.4 
D)  −$4.6 (Surplus) 
E)  $0.8 
A)  $4.6 
B)  −$6.4 (Surplus) 
C)  $2.4 
D)  −$4.6 (Surplus) 
E)  $0.8

Question 20

Carolina Vineyards is considering two alternative production methods for turning grapes into wine.One method calls for using a hand-operated press,while the other would employ a new,automated press.It has been estimated that the variable cost per bottle will amount to $2.00 using the old press and $0.50 using the new machine.If the new machine is purchased,fixed operating costs will equal $150,000,and interest charges will be $80,000.Fixed operating costs of $25,000 will be incurred if the company decides to use the old press,and interest costs will be zero because no debt will be needed.Assume that sales (in units)will be 100,000 bottles under the automated method and 75,000 units under the labor intensive method.What sales price per unit would cause Carolina to be indifferent between the two methods?

Accepted Answer

A)  $2.00 
B)  $2.20 
C)  $4.00 
D)  $4.20 
E)  $6.00 
A)  $2.00 
B)  $2.20 
C)  $4.00 
D)  $4.20 
E)  $6.00

Which of the following statements is correct?

-Refer to Trident Food Corporation.What is the operating breakeven point in sales units (Q)for Trident Foods?

Breakeven analysis is the method of determining the point at which sales will just cover ____ costs.

Financial control involves a feedback and adjustment process that (1)ensures that existing plans are followed,or (2)modifies existing plans in response to changes in the firm's operating environment.

Any firm with a positive growth rate in sales will require some amount of external funding,assuming all existing ratios are to be maintained.

If a small change in sales results in a large change in EPS,then it must be caused by the financial leverage associated with the firm.

Two firms that have the same financial leverage must also have the same ROE,because both financial leverage and ROE measure the risk associated with equity financing.

The degree of operating leverage has which of the following characteristics?

The degree of financial leverage for ABC Inc.is 2.5,and the degree of financial leverage for XYZ Corporation is 1.5.According to this information,which firm is considered to have greater financial risk?

The projected balance sheet method assumes that the key ratios are constant,which means,for example,that if you plotted a graph of inventories versus sales,the regression line would be linear and would have a positive Y-intercept.

Other things held constant,a high degree of operating leverage will mean that a relatively small change in sales will result in a large change in operating income.

The fact that long-term debt and equity funds are raised infrequently and in large amounts lessens the need for the firm to forecast them on a continual basis.

Which of the following liabilities increase typically and create spontaneously generated funds as sales increase for the firm?

The operating breakeven volume in units can be found by dividing the firm's total fixed cost in dollars by its profit margin per unit (i.e. ,price less variable cost).

At the firm's operating breakeven point,total revenues and total variable costs are exactly equal.

The higher the DOL,the greater the firm's use of debt and the more earnings will change following a change in sales.

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on uniform cash receipts and disbursements,but actual receipts are concentrated at the beginning of each month.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Exam 8: Financial Planning and Control

Which of the following statements is correct?

-Refer to Trident Food Corporation.What is the operating breakeven point in sales units (Q)for Trident Foods?

Breakeven analysis is the method of determining the point at which sales will just cover ____ costs.

Financial control involves a feedback and adjustment process that (1)ensures that existing plans are followed,or (2)modifies existing plans in response to changes in the firm's operating environment.

Any firm with a positive growth rate in sales will require some amount of external funding,assuming all existing ratios are to be maintained.

If a small change in sales results in a large change in EPS,then it must be caused by the financial leverage associated with the firm.

Two firms that have the same financial leverage must also have the same ROE,because both financial leverage and ROE measure the risk associated with equity financing.

The degree of operating leverage has which of the following characteristics?

The degree of financial leverage for ABC Inc.is 2.5,and the degree of financial leverage for XYZ Corporation is 1.5.According to this information,which firm is considered to have greater financial risk?

The projected balance sheet method assumes that the key ratios are constant,which means,for example,that if you plotted a graph of inventories versus sales,the regression line would be linear and would have a positive Y-intercept.

Other things held constant,a high degree of operating leverage will mean that a relatively small change in sales will result in a large change in operating income.

The fact that long-term debt and equity funds are raised infrequently and in large amounts lessens the need for the firm to forecast them on a continual basis.

Which of the following liabilities increase typically and create spontaneously generated funds as sales increase for the firm?

The operating breakeven volume in units can be found by dividing the firm's total fixed cost in dollars by its profit margin per unit (i.e. ,price less variable cost).

At the firm's operating breakeven point,total revenues and total variable costs are exactly equal.

The higher the DOL,the greater the firm's use of debt and the more earnings will change following a change in sales.

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on uniform cash receipts and disbursements,but actual receipts are concentrated at the beginning of each month.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters