Exam 14: Short-Term Financial Planning

Amalgamated Enterprises is planning to purchase some new equipment.With this new equipment,the company expects sales to increase from $8,000,000 to $10,000,000.A portion of the financing for the purchase of the equipment will come from a $1,000,000 new common stock issue.The company knows that its current assets,fixed assets,accounts payable,and accrued expenses increase directly with sales.The company's net profit margin on sales is 8 percent,and the company plans to pay 40 percent of its after-tax earnings in dividends.A copy of the company's current balance sheet is given below. Amalgamated Enterprises Balance Sheet Prepare a pro forma balance sheet for Amalgamated for next year.

Using the percent of sales method and assuming that no excess capacity exists,a 20% increase in sales will result in

Discretionary sources of financing are those sources that vary automatically with a firm's level of sales.

Fixed assets are often estimated incorrectly by the percent of sales method because

JR Textiles,a highly profitable company,is considering two growth strategies,one that will achieve sales growth of 20% in one year,and the other that will achieve 20% growth in sales,but over a 4-year time frame.Assuming JR Textiles uses the percent of sales method,which of the following statements is true?

The percent of sales method provides a general estimate,but the more detailed cash budget will ultimately be used to estimate financing needs.

In the percent of sales method,a company's asset requirements are based on the company's projected sales level.

Budgets should not be used for performance evaluation because there is too much uncertainty involved and this makes it unfair to the person being evaluated.

Using the 2010 financial statements for DRE Corporation and this additional information,prepare a pro forma income statement and balance sheet for the year 2011.Determine the discretionary financing needed (DFN)and assume that if the DFN is positive,the company will increase long-term debt,and if DFN is negative,the company will pay back some long-term debt. Sales for next year (2011)are expected to increase by $300,000 to $1,800,000.The firm is running efficiently and at full capacity so that all assets and spontaneous liabilities are expected to increase proportionally with sales.The dividend payout ratio for 2011 will be 40%. DRE Corporation 2010 Financial Statements

ABC Corporation began operations on January 1^st of this year with a cash balance of $250,000.ABC had sales of $200,000 for the month of January,all on credit.ABC allows its customers 30 days to pay.ABC's expenses for January equal $150,000,and ABC's ending balance in accounts payable at January 31^st is $50,000.In its cash budget for January,ABC's ending cash balance should be equal to

Other things equal,if a firm increases its dividend payout ratio,its discretionary financing needed will also increase.

Using the percentage of sales method,forecasted retained earnings balance is equal to

Spontaneous sources of funds refers to all of the below except:

Discretionary financing needed will be zero when the company's sales growth rate is zero.

A budget

The percent of sales method does not accurately estimate the balances for lumpy assets.Which of the following statements best describes the possible errors?

Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.

All of the following are examples of sources of discretionary financing except:

In what way does a cash budget provide management with better information about financing requirements than a pro forma balance sheet?

Financial forecasting is the process of attempting to estimate a firm's future financing requirements.