Question 1

Potential changes in sales prices, fixed operating costs and/or variable costs should be taken into account when using breakeven analysis.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is (are) typically part of the cash budget?

Accepted Answer

A)  Payments lag. 
B)  Payment for plant construction. 
C)  Cumulative cash. 
D)  All of the above. 
E)  Only answers a and c above. 
A)  Payments lag. 
B)  Payment for plant construction. 
C)  Cumulative cash. 
D)  All of the above. 
E)  Only answers a and c above.

Question 3

Kulwicki Corporation wants to determine the effect of an expansion of its sales on its operating income (EBIT).The firm's current DOL is 2.5.It projects new unit sales to be 170,000, an increase of 45,000 over last year's level of 125,000 units.Last year's EBIT was $60,000.Based on a DOL of 2.5, what is this year's projected EBIT with the increase in sales?

Accepted Answer

A)  $60,000 
B)  $175,000 
C)  $100,000 
D)  $90,000 
E)  $114,000 
A)  $60,000 
B)  $175,000 
C)  $100,000 
D)  $90,000 
E)  $114,000

Question 4

An increase in the firm's inventory balance normally will require additional financing unless the increase is matched by an equally large decrease in some other asset account.

Accepted Answer

A) True 
 B)False

Question 5

Other things held constant, the higher the degree of total leverage exhibited by a firm, the greater the risk associated with that firm.

Accepted Answer

A) True 
 B)False

Question 6

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 7

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Accepted Answer

A) True 
 B)False

Question 8

Holding other things constant, the additional funds required for financing the firm's operations would be reduced with an increase in the firm's

Accepted Answer

A)  Dividend payout ratio. 
B)  Profit margin. 
C)  Cost of external funds. 
D)  Expected growth rate in sales. 
E)  Tax rate. 
A)  Dividend payout ratio. 
B)  Profit margin. 
C)  Cost of external funds. 
D)  Expected growth rate in sales. 
E)  Tax rate.

Question 9

Which of the following statements is correct?

Accepted Answer

A)  One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income. 
B)  The first, and most critical, step in constructing a set of pro forma financial statements is establishing the sales forecast. 
C)  Pro forma financial statements as discussed in the text are used primarily to assess a firm's historical performance. 
D)  All else equal, if a firm operates at full capacity, the greater its payout ratio, the less additional funds that will be needed for a particular growth in sales. 
E)  The projected balance sheet forecasting method produces accurate results when fixed assets are lumpy and when economies of scale are present. 
A)  One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income. 
B)  The first, and most critical, step in constructing a set of pro forma financial statements is establishing the sales forecast. 
C)  Pro forma financial statements as discussed in the text are used primarily to assess a firm's historical performance. 
D)  All else equal, if a firm operates at full capacity, the greater its payout ratio, the less additional funds that will be needed for a particular growth in sales. 
E)  The projected balance sheet forecasting method produces accurate results when fixed assets are lumpy and when economies of scale are present.

Question 10

The projected balance sheet forecasting method would be appropriate if, in a regression of sales on each asset and spontaneous liability, the regression line was linear and passed through the origin.

Accepted Answer

A) True 
 B)False

Question 11

The purpose of financial breakeven analysis is to determine the level of sales a firm needs in order to cover the fixed and variable costs associated with producing and selling inventory items.

Accepted Answer

A) True 
 B)False

Question 12

Jill's Wigs Inc.had the following balance sheet last year:   Jill has just invented a non-slip wig for men which she expects will cause sales to double, increasing after-tax net income to $1,000.She feels that she can handle the increase without adding any fixed assets.(1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?

Accepted Answer

A)  No; zero 
B)  Yes; $7,700 
C)  Yes; $1,700 
D)  Yes; $700 
E)  No; there will be a $700 surplus. 
A)  No; zero 
B)  Yes; $7,700 
C)  Yes; $1,700 
D)  Yes; $700 
E)  No; there will be a $700 surplus.

Question 13

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 14

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.

Accepted Answer

A) True 
 B)False

Question 15

To forecast the balance sheet, the firm must:

Accepted Answer

A)  Project the asset requirement for the coming period. 
B)  Project the liabilities and equity that will be provided by normal operations. 
C)  Estimate the additional funds needed. 
D)  All of the above. 
A)  Project the asset requirement for the coming period. 
B)  Project the liabilities and equity that will be provided by normal operations. 
C)  Estimate the additional funds needed. 
D)  All of the above.

Question 16

One situation where operating breakeven analysis can be valuable is when a firm plans to increase fixed investment in order to lower variable cost, such as labor costs.

Accepted Answer

A) True 
 B)False

Question 17

The financial breakeven point for a firm is defined as the level of ____ that produces ____ equal to zero.

Accepted Answer

A)  sales; EBIT. 
B)  sales; gross profit. 
C)  EPS; sales. 
D)  gross profit; EBIT. 
E)  EBIT; EPS. 
A)  sales; EBIT. 
B)  sales; gross profit. 
C)  EPS; sales. 
D)  gross profit; EBIT. 
E)  EBIT; EPS.

Question 18

Which of the following is a key determinant of financial leverage?

Accepted Answer

A)  Level of debt. 
B)  Technology. 
C)  Labor costs. 
D)  Amount of fixed assets used by the firm. 
E)  Variable cost of goods sold. 
A)  Level of debt. 
B)  Technology. 
C)  Labor costs. 
D)  Amount of fixed assets used by the firm. 
E)  Variable cost of goods sold.

Question 19

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.

Question 20

Projected Balance Sheet Method
Trident Food Corporation
Trident Food Corporation generated the following income statement for the most recent fiscal year, which ended December 31, 2010:   Each item of inventory Trident Foods produces has a selling price of $20.
-Refer to Trident Food Corporation.What is the financial breakeven point for Trident Foods?

Accepted Answer

A)  EBIT = $146,500 
B)  Sales = 4,800 units 
C)  EBIT = $10,000 
D)  Net income = $10,000 
E)  EBIT = $11,400 
A)  EBIT = $146,500 
B)  Sales = 4,800 units 
C)  EBIT = $10,000 
D)  Net income = $10,000 
E)  EBIT = $11,400

Potential changes in sales prices, fixed operating costs and/or variable costs should be taken into account when using breakeven analysis.

Which of the following is (are) typically part of the cash budget?

An increase in the firm's inventory balance normally will require additional financing unless the increase is matched by an equally large decrease in some other asset account.

Other things held constant, the higher the degree of total leverage exhibited by a firm, the greater the risk associated with that firm.

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Holding other things constant, the additional funds required for financing the firm's operations would be reduced with an increase in the firm's

Which of the following statements is correct?

The projected balance sheet forecasting method would be appropriate if, in a regression of sales on each asset and spontaneous liability, the regression line was linear and passed through the origin.

The purpose of financial breakeven analysis is to determine the level of sales a firm needs in order to cover the fixed and variable costs associated with producing and selling inventory items.

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?

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.

To forecast the balance sheet, the firm must:

One situation where operating breakeven analysis can be valuable is when a firm plans to increase fixed investment in order to lower variable cost, such as labor costs.

The financial breakeven point for a firm is defined as the level of that produces equal to zero.

Which of the following is a key determinant of financial leverage?

Which of the following statements is correct?

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

Potential changes in sales prices, fixed operating costs and/or variable costs should be taken into account when using breakeven analysis.

Which of the following is (are) typically part of the cash budget?

An increase in the firm's inventory balance normally will require additional financing unless the increase is matched by an equally large decrease in some other asset account.

Other things held constant, the higher the degree of total leverage exhibited by a firm, the greater the risk associated with that firm.

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Holding other things constant, the additional funds required for financing the firm's operations would be reduced with an increase in the firm's

Which of the following statements is correct?

The projected balance sheet forecasting method would be appropriate if, in a regression of sales on each asset and spontaneous liability, the regression line was linear and passed through the origin.

The purpose of financial breakeven analysis is to determine the level of sales a firm needs in order to cover the fixed and variable costs associated with producing and selling inventory items.

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?

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.

To forecast the balance sheet, the firm must:

One situation where operating breakeven analysis can be valuable is when a firm plans to increase fixed investment in order to lower variable cost, such as labor costs.

The financial breakeven point for a firm is defined as the level of ____ that produces ____ equal to zero.

Which of the following is a key determinant of financial leverage?

Which of the following statements is correct?

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

The financial breakeven point for a firm is defined as the level of that produces equal to zero.