Finance Chapter 3 - Quiz

Please refer to Oscar's financial statements above. All of Oscar's costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year? A. $949 B. $1,034 C. $1,113 D. $1,730 E. $2,670 F. None of the above.

B. $1,034 Pro forma accounts receivable = $940 × (1 + 0.10) = $1,034

A drawback of forecasting using spreadsheets is that typical spreadsheet programs are not equipped to deal with the circularity involving interest expense and debt.

false

An annual financial forecast for 2013 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2013

false

Scenario analysis involves changing one input to a financial forecast, whereas sensitivity analysis involves changing multiple inputs.

false

All else equal, increasing the assumed payables period in a financial forecast will decrease external funding required.

true

Cash budgets are less informative than pro forma financial statements.

true

Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding.

true

To estimate Missed Places Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? A. $169,000 B. $170,400 C. $181,400 D. $506,300 E. $518,700 F. None of the above.

A. $169,000 158,000 + 23,400 - 12,400 = $169,000

You are estimating your company's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year? A. $20 million B. $70 million C. $150 million D. $160 million E. $180 million F. None of the above.

A. $20 million

Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2014, what should be the projection for shareholders' equity for 2014? A. $5,349 B. $5,436 C. $5,451 D. $5,536

A. $5,349 $4,942 + $307 + $100 = $5,349

Oscar's Incredible Eatery ($ Thousands) Income statement for the year ending Dec 31 2014 Net sales 17,300 Costs of goods sold 10,600 Depreciation 3,250 EDIT 3,450 Interest expenses 680 EBT 2,770 Tax 910 Earning after tax (or NI) 1,860 Dividends 460 Balance Sheet as of Dec 31 2014 Cash 350 Accounts payable 1,920 Accounts receivable 940 Long-term debt 3500 Inventory 2,360 Common stock The 7,500 Total current assets 3,650 Retained Earnings 1,580 Net Fixed assets 14,500 Total Liab & Equity 14,500 Please refer to Oscar's financial statements above. What was Oscar's increase in retained earnings during 2014? A. $450 B. $1,380 C. $1,400 D. $2,220 E. None of the above.

B. $1,400 $1,860 - $460 = $1,400

Please refer to Oscar's financial statements above. Sales are projected to increase by 5 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year? A. $1,309.19 B. $1,470.00 C. $1,884.90 D. $2,667.78 E. $3,001.40 F. None of the above.

B. $1,470.00 Projected addition to retained earnings = $1,400 × (1 + 0.05) = $1,470

In the above financial statements, Royal Corporation has prepared (incomplete) pro forma financial statements for 2014, based on actual financial statements for 2013. Royal Corp. used the percent-of-sales method assuming a sales growth rate of 10% for 2014. If capital expenditures are planned to be $1,615 in 2014, then what would be the appropriate projection for net fixed assets in 2014? A. $4,453 B. $4,563 C. $4,663 D. $5,663

B. $4,563 $4,048 + $1,615 − $1,100 = $4,563

You are preparing pro forma financial statements for 2014 using the percent-of-sales method. Sales were $100,000 in 2013 and are projected to be $132,000 in 2014. Net income was $5,000 in 2013 and is projected to be $6,000 in 2014. Equity was $45,000 at year-end 2012 and $47,500 at year-end 2013. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2014? A. $55,000 B. $50,500 C. $61,000 D. Insufficient information is provided to project equity in 2014.

B. $50,500 Half of the net income in 2013 was added to equity in 2013, so half of net income in 2014 will be added to equity in 2014. $47,500 + 50% ($6,000) = $50,500

Please refer to Oscar's financial statements above. Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar's external financing need for next year? A. -$410 B. -$282 C. $235 D. $1,320 E. $7,240 F. None of the above.

B. -$282 Projected total assets = $14,500 ×1.10 = $15,950 Projected total liabilities = $1,920 ×1.10 + $3,500 = $5,612 Projected total equity = $7,500 + ($1,580 + $1,400 ×1.1) = $10,620 External financing needed = $15,950 −($5,612 + $10,620) = −$282

Please refer to Oscar's financial statements above. Assume a constant debt-equity ratio, net profit margin and dividend payout ratio, and further assume all of Oscar's expenses, assets and current liabilities vary directly with sales. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent? A. $10,857.50 B. $10,931.38 C. $11,663.75 D. $15,587.50 E. $18,987.50 F. None of the above.

C. $11,663.75 Pro forma net fixed assets = $10,850 ×(1 + 0.075) = $11,663.75

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya's sales for April were $420 and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. aya collect 50% for the month of sales and 50% for the month following the month of sales. What is the firm's beginning cash balance on the end of May? A. $145 B. $155 C. $195 D. $205 E. $225

C. $225 Cash balance = $175 + 50%(480) + 50% (420) -110 - 290 = 225

The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect: A. 60 percent of February sales. B. 15 percent of April sales. C. 60 percent of March sales. D. 15 percent of March sales. E. 25 percent of February sales.

C. 60 percent of March sales.

Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000? A. Total assets cannot grow by more than $10,000. B. Dividends cannot exceed $10,000. C. Retained earnings cannot grow by more than $12,000. D. Long-term debt cannot grow by more than $5,000.

C. Retained earnings cannot grow by more than $12,000.

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a: A. pro forma income statement. B. sales projection. C. cash budget. D. receivables analysis. E. credit analysis. F. None of the above.

C. cash budget.

Please refer to the pro forma financial statements for Royal Corporation above. Assume that net fixed assets are projected to be 5,000 for 2014 and that shareholders' equity is projected to be 5,500 for 2014. If long-term debt is the plug figure, what should be the projection for long-term debt for Royal Corporation in 2014? A. $2,206 B. $2,363 C. $2,455 D. $2,847

D. $2,847 Total assets would be $1,046 + $6,233 + $4,660 + $5,000 = $16,939 Total liabilities and equity, without long-term debt, would be $431 + $8,161 + $5,500 = $14,092 Long-term debt must make up the difference = $16,939 - $14,092 = $2,847

Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. E. The ending cash balance must equal the minimum desired cash balance.

D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.

The most common approach to developing pro forma financial statements is called the: A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach. F. None of the above.

D. percent-of-sales method.

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August? A. $621 B. $628 C. $633 D. $639 E. $643

E. $643 August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643

Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below? A. October, November, and December B. November, December, and January C. December, January, and February D. January, February, and March E. February, March, and April

E. February, March, and April

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis A. II and IV only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

E. I, III, and IV only