Exam 8: Financial Planning and Control

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.What is Marcus' degree of operating leverage in sales dollars?

The degree of operating leverage for ABC Inc.is 3.5,and the degree of operating leverage for XYZ Corporation is 7.0.According to this information,which firm is considered to have greater business risk?

A firm has the following balance sheet: Cash:$ 10 Accounts payable:$ 10 Accounts receivable:10 Notes payable:20 Inventories:10 Long-term debt:40 Fixed assets:90 Common stock:40 Retained earnings:10 Total assets:$120 Total liabilities and equity:$120 Fixed assets are being used at 80 percent of capacity;sales for the year just ended were $200;sales will increase $10 per year for the next 4 years;the profit margin is 5 percent;and the dividend payout ratio is 60 percent.Assume that fixed assets cannot be sold.What are the total external financing requirements for the entire 4 years,i.e. ,the total AFN for the 4-year period?

Elephant Books sells paperback books for $7 each.The variable cost per book is $5.At current annual sales of 200,000 books,the publisher is just breaking even.It is estimated that if the authors' royalties are reduced,the variable cost per book will drop by $1.Assume authors' royalties are reduced and sales remain constant;how much more money can the publisher put into advertising (a fixed cost)and still break even?

Considering each action independently and holding other things constant,which of the following actions would reduce the firm's need for additional capital?

Financial breakeven analysis can be used to help evaluate the impact various forms of financing,such as debt and equity,will have on the riskiness of a firm.

If a firm has a high degree of leverage then a small change in sales results in

Suppose a firm uses a high degree of operating leverage and operates in an industry whose sales are greatly affected by changes in the overall level of economic activity.The riskiness of that firm's earnings stream will likely be greater than the earnings of a firm in the same industry which has a lower degree of operating leverage.

All of the following are commonly examples of variable costs for a firm except

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.

If firm A uses more operating leverage than firm B,firm A will probably have a greater percentage profit margin per unit than firm B,if both firms are otherwise identical and operating above their respective operating breakeven levels.

Alternative methods for producing a given product often have different degrees of operating leverage and hence have different breakeven points and degrees of risk.

You are the owner of a small business which has the following balance sheet: Current assets:$ 5,000 Accounts payable:$ 1,000 Net fixed assets:10,000 Accruals:1,000 Long-term debt:5,000 Common equity:8,000 Total assets:$15,000 Total:$15,000 Fixed and current assets are fully utilized,and the sales/assets and sales/spontaneous liabilities ratios will remain constant.Next year you expect sales to increase by 50 percent.You also expect to retain $2,000 of next year's earnings within the firm.What is next year's additional external funding requirement,i.e. ,what is your firm's AFN?

Everything else equal,the higher the DFL is for a firm,the closer its operations are to its financial breakeven point.

-Refer to Trident Food Corporation.What is the degree of total leverage for Trident Foods?

Two firms which have the same operating leverage must also have the same ROA,since operating leverage and ROA both measure the effective utilization of assets by the firm.

Which of the following would generally be considered variable costs?

A good control system helps to ensure that plans are executed properly and to facilitate a timely modification of plans if the assumptions upon which the initial plans are based turn out to be inaccurate.

Underestimating the sales in your forecast could have which of the following effects on the firm?

Silver King Inc.is currently running at 60 percent of full capacity.The plant and equipment are currently valued $125 million and Silver King generated sales of $90 million.What is the full capacity sales of Silver King with their current assets?