Question 1

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 operating breakeven point in sales units (Q) for Trident Foods?

Accepted Answer

A)   7,500
B)   5,625
C)   6,825
D)   4,800
E)   2,700 D

Question 2

Musgrave Corporation has fixed operating costs of $46,000 and variable costs that are 30% of the current sales price of $2.15.At a price of $2.15, Musgrave sells 40,000 units.Musgrave can increase sales by 10,000 units by cutting its unit price from $2.15 to $1.95, but variable cost per unit won't change.Should it cut its price?

Accepted Answer

A)   No, EBIT decreases by $6,000.
B)   No, EBIT decreases by $250.
C)   Yes, EBIT increases by $11,500.
D)   Yes, EBIT increases by $8,050.
E)   Yes, EBIT increases by $5,050. D

Question 3

Other things held constant, which of the following statements is correct if a firm currently is operating at its financial breakeven point?

Accepted Answer

A)   EBIT must be greater than zero.
B)   EBIT would equal zero if the firm is financed only with common stock (i.e., there is no debt or preferred stock) .
C)   EBIT would equal zero, hence EPS would be less than zero, if the firm has preferred stock but no debt.
D)   EPS would equal zero only if the firm is financed with some amount of debt.
E)   The firm would not be considered to have much financial risk, especially when compared to a firm that operates well above its financial breakeven point. B

Question 4

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

Accepted Answer

A) True 
 B)False

Question 5

You have been given the information below on the Crum Company.Crum expects sales to grow by 50% in 2011, and operating costs should increase at the same rate.Fixed assets were being operated at 40% of capacity in 2010, but all other assets were used to full capacity.Underutilized fixed assets cannot be sold.Current assets and spontaneous liabilities should increase at the same rate as sales during 2011.The company plans to finance any external funds needed as 35% notes payable and 65% common stock.After taking financing feedbacks into account, and after the second pass, what is Crum's projected ROE using the projected balance sheet method? Information on the Crum Company:

Accepted Answer

A)   16.98%
B)   23.73%
C)   25.68%
D)   19.61%
E)   23.24%

Question 6

The higher the percentage of a firm's total costs that are fixed, the higher the degree of operating leverage and the lower the operating breakeven point.

Accepted Answer

A) True 
 B)False

Question 7

Martin Corporation currently sells 180,000 units per year at a price of $7.00 per unit; its variable cost is $4.20 per unit; and fixed operating costs are $400,000.Martin is considering expanding into two additional states which would increase its fixed costs to $650,000 and would increase its variable unit cost to an average of $4.48 per unit.If Martin expands it expects to sell 270,000 units at $7.00 per unit.By how much will Martin's operating breakeven sales dollar level change?

Accepted Answer

A)   $183,333
B)   $456,500
C)   $805,556
D)   $910,667
E)   $1,200,000

Question 8

Assume a portion of a firm's long-term funds includes either debt or preferred stock.Which of the following statements is correct?

Accepted Answer

A)   The firm must possess operating leverage, which means that a change in net income will result in a greater percentage change in earnings before interest and taxes (EBIT) .
B)   The firm has financial leverage, which means that a change in sales will result in a greater percentage change in EBIT.
C)   The firm has financial leverage, which means that a change in EBIT will result in a greater percentage change in earnings per share (EPS) .
D)   The firm doesn't have leverage, because leverage is created through the use of common equity financing only.
E)   None of the above is a correct answer.

Question 9

Carolina Vineyards is considering two alternative production methods for turning grapes into wine.One method calls for using a hand-operated press, while the other would employ a new, automated press.It has been estimated that the variable cost per bottle will amount to $2.00 using the old press and $0.50 using the new machine.If the new machine is purchased, fixed operating costs will equal $150,000, and interest charges will be $80,000.Fixed operating costs of $25,000 will be incurred if the company decides to use the old press, and interest costs will be zero because no debt will be needed.Assume that sales (in units) will be 100,000 bottles under the automated method and 75,000 units under the labor intensive method.What sales price per unit would cause Carolina to be indifferent between the two methods?

Accepted Answer

A)   $2.00
B)   $2.20
C)   $4.00
D)   $4.20
E)   $6.00

Question 10

An advantage of breakeven analysis is that it can be applied with equal precision whether a firm's cost curve is linear or nonlinear.

Accepted Answer

A) True 
 B)False

Question 11

The firm 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 met during which stage of the planning and control process

Accepted Answer

A)   control stage
B)   planning stage
C)   forecasting stage
D)   budgeting stage

Question 12

Financial control involves a feedback and adjustment process that (1) ensures that existing plans are followed, or (2) modifies existing plans in response to changes in the firm's operating environment.

Accepted Answer

A) True 
 B)False

Question 13

The use of a high level of operating leverage can enable a firm to maintain a steady operating income despite large changes in the level of sales.

Accepted Answer

A) True 
 B)False

Question 14

Two firms that have the same financial leverage must also have the same ROE, because both financial leverage and ROE measure the risk associated with equity financing.

Accepted Answer

A) True 
 B)False

Question 15

With lumpy assets, a small projected increase in sales could potentially mandate a significant increase in plant and equipment, which would lead to a very large financial requirement.

Accepted Answer

A) True 
 B)False

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

Which method estimates additional funds needed for a firm by projecting the assets needed for the coming and subtracting the projected liabilities spontaneously generated.

Accepted Answer

A)   Spontaneous method
B)   Additional funds needed method
C)   Feedback method
D)   Projected balance sheet method

Question 18

Operating costs include variable costs, depreciation and interest charges.

Accepted Answer

A) True 
 B)False

Question 19

Breakeven analysis can be used to determine how large sales of a new product must be for the firm to achieve profitability, but it is not useful in studying the effects of a general expansion in the firm's operations.

Accepted Answer

A) True 
 B)False

Question 20

Today, computer simulations models can calculate multiple breakeven charts providing management with an idea of how the firm's breakeven point would change under different assumptions for key variables.

Accepted Answer

A) True 
 B)False

Exam 8: Financial Planning and Control

Other things held constant, which of the following statements is correct if a firm currently is operating at its financial breakeven point?

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

The higher the percentage of a firm's total costs that are fixed, the higher the degree of operating leverage and the lower the operating breakeven point.

Assume a portion of a firm's long-term funds includes either debt or preferred stock.Which of the following statements is correct?

An advantage of breakeven analysis is that it can be applied with equal precision whether a firm's cost curve is linear or nonlinear.

The firm 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 met during which stage of the planning and control process

Financial control involves a feedback and adjustment process that (1) ensures that existing plans are followed, or (2) modifies existing plans in response to changes in the firm's operating environment.

The use of a high level of operating leverage can enable a firm to maintain a steady operating income despite large changes in the level of sales.

Two firms that have the same financial leverage must also have the same ROE, because both financial leverage and ROE measure the risk associated with equity financing.

With lumpy assets, a small projected increase in sales could potentially mandate a significant increase in plant and equipment, which would lead to a very large financial requirement.

Which method estimates additional funds needed for a firm by projecting the assets needed for the coming and subtracting the projected liabilities spontaneously generated.

Operating costs include variable costs, depreciation and interest charges.

Breakeven analysis can be used to determine how large sales of a new product must be for the firm to achieve profitability, but it is not useful in studying the effects of a general expansion in the firm's operations.

Today, computer simulations models can calculate multiple breakeven charts providing management with an idea of how the firm's breakeven point would change under different assumptions for key variables.