Exam 8: Financial Planning and Control

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.How many units of inventory must Trident Foods sell if it wants to operate at its financial breakeven point?

If a firm has no preferred stock, its financial breakeven point is the sales level that results in net income equal to zero.

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.

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.

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

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

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

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?

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.

One potential benefit of high operating leverage is that it can reduce the average cost per unit at high levels of output, thus generating a competitive cost advantage.

The DOL is an index number that measures the effect of a change in sales price on the operating breakeven point.

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 degree of financial leverage for Aries Inc.is 3.0, and the degree of financial leverage for Common Capital Corporation is 6.2.According to this information, which firm is considered to have greater overall (total) risk?

The financial control phase of financial forecasting is concerned with implementing the financial plans, and with managing the feedback and adjustment process needed to ensure that the goals of the firm are pursued appropriately.

Hogan Inc.generated EBIT of $240,000 this past year using assets of $1,100,000.The interest rate on its existing long-term debt of $640,000 is 12.5 percent and the firm's tax rate is 40 percent.The firm paid a dividend of $1.27 on each of its 37,800 shares outstanding from net income of $96,000.The total book value of equity is $446,364 of which the common stock account equals $335,000.The firm's shares sell for $28.00 per share in the market.The firm forecasts a 10% increase in sales, assets, and EBIT next year, and a dividend of $1.40 per share.If the firm needs additional capital funds, it will raise 60% with debt and 40% with equity.The cost of any new debt will be 13%.Spontaneous liabilities are estimated at $15,000 for next year, representing an increase of 10% over this year.Except for spontaneous liabilities, the firm uses no other sources of current liabilities and will continue this policy in the future.What will be the cumulative AFN Hogan will need to balance its projected balance sheet using the projected balance sheet method through the first two passes?

The projected balance sheet method of forecasting is based on which of the following assumptions?

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

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

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.

The closer a firm is to its operating breakeven point, the greater is the absolute value of the degree of operating leverage.