Question 1

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 2

Other things held constant, if a firm operates at a profit and sales increase, the degree of financial leverage will decline.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is correct?

Accepted Answer

A)  Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), so depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows and cash outflows occur on a regular basis, such as the situation where inflows from collections occur in equal amounts each day and most payments are made regularly on the 10th of each month, then it is not necessary to use a daily cash budget.A cash budget prepared at the end of the month will suffice. 
C)  Cash budgets are more important for fast food retailers, such as McDonald's, which deal primarily with cash than for manufacturers, such as General Motors, that generally sell on credit. 
D)  When constructing a cash budget, it probably is easier to forecast cash inflows than cash outflows. 
E)  All of the above statements are false. 
A)  Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), so depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows and cash outflows occur on a regular basis, such as the situation where inflows from collections occur in equal amounts each day and most payments are made regularly on the 10th of each month, then it is not necessary to use a daily cash budget.A cash budget prepared at the end of the month will suffice. 
C)  Cash budgets are more important for fast food retailers, such as McDonald's, which deal primarily with cash than for manufacturers, such as General Motors, that generally sell on credit. 
D)  When constructing a cash budget, it probably is easier to forecast cash inflows than cash outflows. 
E)  All of the above statements are false.

Question 4

NJM Incorporated is a football manufacturer.NJM has fixed operating costs of $400,000 and variable costs of $12 per football.The footballs sell for $35 each and NJM plans to sell 300,000 footballs this year.What are NJM's total operating costs for the year?

Accepted Answer

A)  $10,900,000 
B)  $4,000,000 
C)  $3,600,000 
D)  $3,200,000 
E)  $400,000 
A)  $10,900,000 
B)  $4,000,000 
C)  $3,600,000 
D)  $3,200,000 
E)  $400,000

Question 5

All else being equal, which of the following will lower the breakeven point of a firm?

Accepted Answer

A)  higher fixed costs 
B)  lower selling price 
C)  lower variable costs 
D)  none of the above 
A)  higher fixed costs 
B)  lower selling price 
C)  lower variable costs 
D)  none of the above

Question 6

You are the owner of a small business which has the following balance sheet:   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?

Accepted Answer

A)  No additional funds are required. 
B)  $3,500 
C)  $4,500 
D)  $5,500 
E)  The answer depends on this year's sales level. 
A)  No additional funds are required. 
B)  $3,500 
C)  $4,500 
D)  $5,500 
E)  The answer depends on this year's sales level.

Question 7

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 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Other things held constant, the greater the firm's use of debt, the greater the change in EPS that will result from a change in sales volume.

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

A)  $208 million 
B)  $150 million 
C)  $125 million 
D)  $144 million 
E)  $100 million 
A)  $208 million 
B)  $150 million 
C)  $125 million 
D)  $144 million 
E)  $100 million

Question 12

The projected balance sheet forecasting method produces accurate results unless which of the following condition(s) is (are) present?

Accepted Answer

A)  Fixed assets are "lumpy." 
B)  Strong economies of scale are present. 
C)  Excess capacity exists because of a temporary recession. 
D)  Answers a, b, and c all make the projected balance sheet method inaccurate. 
E)  Answers a and c make the projected balance sheet method inaccurate, but, as the text explains, the assumption of increasing economies of scale is built into the projected balance sheet method. 
A)  Fixed assets are "lumpy." 
B)  Strong economies of scale are present. 
C)  Excess capacity exists because of a temporary recession. 
D)  Answers a, b, and c all make the projected balance sheet method inaccurate. 
E)  Answers a and c make the projected balance sheet method inaccurate, but, as the text explains, the assumption of increasing economies of scale is built into the projected balance sheet method.

Question 13

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

Accepted Answer

A)  An increase in the dividend payout ratio. 
B)  A decrease in the profit margin. 
C)  A decrease in the days sales outstanding. 
D)  An increase in expected sales growth. 
E)  A decrease in the accrual accounts (accrued wages and taxes). 
A)  An increase in the dividend payout ratio. 
B)  A decrease in the profit margin. 
C)  A decrease in the days sales outstanding. 
D)  An increase in expected sales growth. 
E)  A decrease in the accrual accounts (accrued wages and taxes).

Question 14

As a firm's sales grow, its current asset accounts tend to increase.For instance, as sales increase, the firm's purchases increase and its level of accounts payable will increase.Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.

Accepted Answer

A) True 
 B)False

Question 15

When a firm increases its degree of operating leverage by substituting fixed costs for variable costs, it normally does so to decrease its breakeven point and to increase its profit.

Accepted Answer

A) True 
 B)False

Question 16

If a firm's degree of total leverage (DTL) is 8.0, which of the following must be correct?

Accepted Answer

A)  The firm must have fixed operating costs. 
B)  The firm must have fixed financial costs. 
C)  The firm must have both fixed operating costs and fixed financial costs. 
D)  The firm must have some fixed costs, but not enough information is given to determine whether the fixed costs are operating, financial, or both. 
E)  With the information given, we cannot tell whether the firm has any fixed costs (either operating or financial) at all. 
A)  The firm must have fixed operating costs. 
B)  The firm must have fixed financial costs. 
C)  The firm must have both fixed operating costs and fixed financial costs. 
D)  The firm must have some fixed costs, but not enough information is given to determine whether the fixed costs are operating, financial, or both. 
E)  With the information given, we cannot tell whether the firm has any fixed costs (either operating or financial) at all.

Question 17

Which of the following statements about cash management is false?

Accepted Answer

A)  Depreciation expense does not appear explicitly on the cash budget, but its tax effects are included. 
B)  If cash flows are not uniform during the month, then weekly or perhaps daily cash budgets should be prepared rather than monthly budgets. 
C)  Compensating balance requirements do not affect a firm's target cash balance. 
D)  Cash management involves costs, and it is important to analyze whether the benefits received outweigh the costs included. 
E)  The cash budget is the foundation of good cash management. 
A)  Depreciation expense does not appear explicitly on the cash budget, but its tax effects are included. 
B)  If cash flows are not uniform during the month, then weekly or perhaps daily cash budgets should be prepared rather than monthly budgets. 
C)  Compensating balance requirements do not affect a firm's target cash balance. 
D)  Cash management involves costs, and it is important to analyze whether the benefits received outweigh the costs included. 
E)  The cash budget is the foundation of good cash management.

Question 18

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 19

Firms A and B produce exactly the same products, but use different production technology.Firm A's variable costs are greater than those of Firm B, but its operating breakeven point is lower.From this information, other things held constant, we can conclude that Firm B has greater operating leverage than Firm A.

Accepted Answer

A) True 
 B)False

Question 20

One limitation of operating breakeven analysis is that variable cost must be assumed constant throughout the analysis in order to completely analyze changes in fixed investment.

Accepted Answer

A) True 
 B)False

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

Other things held constant, if a firm operates at a profit and sales increase, the degree of financial leverage will decline.

Which of the following statements is correct?

NJM Incorporated is a football manufacturer.NJM has fixed operating costs of $400,000 and variable costs of $12 per football.The footballs sell for $35 each and NJM plans to sell 300,000 footballs this year.What are NJM's total operating costs for the year?

All else being equal, which of the following will lower the breakeven point of a firm?

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.

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

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

Other things held constant, the greater the firm's use of debt, the greater the change in EPS that will result from a change in sales volume.

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?

The projected balance sheet forecasting method produces accurate results unless which of the following condition(s) is (are) present?

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

As a firm's sales grow, its current asset accounts tend to increase.For instance, as sales increase, the firm's purchases increase and its level of accounts payable will increase.Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.

When a firm increases its degree of operating leverage by substituting fixed costs for variable costs, it normally does so to decrease its breakeven point and to increase its profit.

If a firm's degree of total leverage (DTL) is 8.0, which of the following must be correct?

Which of the following statements about cash management is false?

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

One limitation of operating breakeven analysis is that variable cost must be assumed constant throughout the analysis in order to completely analyze changes in fixed investment.

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 Concepts

Security Valuation and Selection

Filters

Exam 8: Financial Planning and Control

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

Other things held constant, if a firm operates at a profit and sales increase, the degree of financial leverage will decline.

Which of the following statements is correct?

NJM Incorporated is a football manufacturer.NJM has fixed operating costs of $400,000 and variable costs of $12 per football.The footballs sell for $35 each and NJM plans to sell 300,000 footballs this year.What are NJM's total operating costs for the year?

All else being equal, which of the following will lower the breakeven point of a firm?

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.

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

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

Other things held constant, the greater the firm's use of debt, the greater the change in EPS that will result from a change in sales volume.

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?

The projected balance sheet forecasting method produces accurate results unless which of the following condition(s) is (are) present?

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

As a firm's sales grow, its current asset accounts tend to increase.For instance, as sales increase, the firm's purchases increase and its level of accounts payable will increase.Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.

When a firm increases its degree of operating leverage by substituting fixed costs for variable costs, it normally does so to decrease its breakeven point and to increase its profit.

If a firm's degree of total leverage (DTL) is 8.0, which of the following must be correct?

Which of the following statements about cash management is false?

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

One limitation of operating breakeven analysis is that variable cost must be assumed constant throughout the analysis in order to completely analyze changes in fixed investment.

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 Concepts

Security Valuation and Selection

Filters