POF MASTER 4-6
A firm has beginning inventory of 450 units at a cost of $10 each. Production during the period was 500 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)? A. $7,500 B. $8,000 C. $7,900 D. $8,100
a
A weakness of break-even analysis is that it assumes A. revenue and costs are a linear (constant) function of volume. B. prices and costs increase when the economy is strong and confidence is high. C. the cost of goods sold goes up as revenue increases. D. None of the options
a
BHS Inc. determines that sales will rise from $400,000 to $550,000 next year. Spontaneous assets are 60% of sales, and spontaneous liabilities are 40% of sales. BHS has an 8% profit margin and a 40% dividend payout ratio. What is the level of required new funds? A. $3,600 B. $5,200 C. $4,000 D. BHS is in balance and no new funds are needed.
a
Cash break-even analysis A. is helpful in analyzing the short-term outlook of the firm, particularly when it is in trouble financially. B. is important when analyzing long-term profitability. C. includes depreciation expense as a fixed cost when calculating the degree of financial leverage. D. None of the options
a
Davison Toaster Corp. sells its products for $150 per unit. It has the following costs: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX The break-even point is A. less than 3,000 units. B. 3,000 units. C. more than 3,500 units. D. Not enough information has been provided to determine the break-even point.
a
Depending upon the state of the economy, Ables Manufacturing Corp. expects to sell the following number of prefabricated buildings. The probability of each state is indicated. What is the expected value of the total sales projection? XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX A. $5,625 B. $4,540 C. $12,800 D. None of the options.
a
Firms that successfully increase their rates of inventory turnover will, among other things, A. be able to reduce their borrowing needs. B. be able to reduce their dividend payments to stockholders. C. find it more difficult to be given credit by their resource suppliers. D. have a greater need for high balances in their cash accounts.
a
GS Cookie Co. forecasts cash receipts for January and February of $18,000 and $20,000, respectively. Cash Payments of $6,000 and $8,000 are expected in these two months. GS Cookie's cash balance at the beginning of January was $5,000, a level that it attempts to maintain. At the beginning of the year, GS Cookie has a $15,000 balance outstanding on its line of credit at the local bank. Based on its cash budget, how much of the line of credit can GS Cookie repay in January and February? A. $15,000 B. $9,000 C. $4,000 D. None. GS Cookie must increase its borrowings.
a
Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 7.5%, and with a long-term financing plan their rate will be 9%. By how much will their earnings after taxes change if they choose the more aggressive financing plan instead of the more conservative plan? A. $10,800 B. ($10,000) C. ($6,000) D. $6,000
a
If Excel Inc. has projected sales of $30,000 in January, $20,000 in February, and $20,000 in March, where 80% of sales are on credit, 20% are collected in the month of sale, and 80% are collected the month after, what are the cash receipts in March? A. $20,000 B. $16,200 C. $21,400 D. $10,300
a
If TechCor has fixed costs of $60,000, variable costs of $1.20/unit, a sales price/unit of $7, and depreciation expense of $25,000, what is their cash breakeven in units? A. 6,034 units B. 11,458 units C. 12,375 units D. 45,833 units
a
If a firm sells 40,000 units and the contribution margin on the firm's single product is $4.00 per unit and fixed costs are $60,000, what will the firm's operating profit be at this level of sales volume? A. $100,000 B. $30,000 C. $15,000 D. $145,000
a
If a firm uses level production with seasonal sales A. as sales decline inventory will increase. B. as sales decline inventory will decrease. C. as sales decline accounts receivables will increase. D. as sales decline inventory and accounts receivables will increase.
a
If projected net cash outflow for January is ($6,500), the beginning cash balance is $16,000, the minimum cash balance is $5,000, and the beginning loan balance is $4,500, what will be the cash balance on the pro forma cash budget at the end of January? A. $5,000 B. $10,000 C. $12,000 D. $4,500
a
If the actual February 28 A/R balance was $12,000 and projected sales in March are $50,000, where 70% of sales are on credit, 60% of credit sales are collected in the month of the sale, and 40% are collected in the month after the sale, what is the projected A/R balance on the pro forma balance sheet for the end of March? A. $26,000 B. $14,000 C. $20,000 D. $35,000
a
If the business cycle is just beginning its upswing, which firm would you anticipate would be likely to show the best growth in EPS over the next year? Firm A has high combined leverage and Firm B has low combined leverage. A. Firm A B. Firm B C. Indifferent between the two D. It depends on how much financial leverage each firm has.
a
If the price per unit decreases because of competition but the cost structure remains the same A. the break-even point rises. B. the degree of combined leverage declines. C. the degree of financial leverage declines. D. All of the options
a
In break-even analysis, the contribution margin is defined as A. price minus variable cost. B. price minus fixed cost. C. variable cost minus fixed cost. D. fixed cost minus variable cost.
a
In the percent-of-sales method A. as the dividend payout ratio goes up, the required new funds also rises. B. as the dividend payout ratio rises, the required new funds declines. C. the dividend payout ratio does not affect new funds. D. None of the options.
a
In the percent-of-sales method, an increase in dividends A. will increase required new funds. B. will decrease required new funds. C. has no effect on required new funds. D. More information is needed.
a
Kuznets Rental Center requires $500,000 in financing over the next two years. Kuznets can borrow long-term at 8 percent interest per year for two years. Alternatively, Kuznets can borrow short-term and pay 6 percent interest in the first year, followed by their paying 9 percent interest in the second year. Assuming Kuznets pays off the accrued interest at the end of each year, which of the following statements is true? A. Kuznets will end up paying more in total interest under the long-term financing plan. B. Kuznets will end up paying less in total interest under the long-term financing plan. C. Kuznets will pay less in the first year under the long-term financing plan. D. Kuznets will pay less in the second year under the short-term financing plan.
a
Loretta & Niece's fixed costs are $425,000, including $25,000 of depreciation expense. The price of each unit sold is $120, and the variable cost per unit is $60. How many units must the firm sell to reach the cash break-even point? A. Less than 7,333 units B. 7,333 units C. More than 7,333 units D. Not enough information has been provided to determine the cash break-even point.
a
Normally, permanent current assets should be financed by A. long-term funds. B. short-term funds. C. borrowed funds. D. internally generated funds.
a
One advantage of level production is that A. manpower and equipment are used efficiently at lower cost. B. current assets fluctuate more than with seasonal production. C. seasonal bulges and sharp declines in current assets occur. D. None of the options are advantageous.
a
Risk exposure due to heavy short-term borrowing can be compensated for by A. carrying highly liquid assets. B. carrying many illiquid assets. C. carrying longer term, more profitable current assets. D. carrying more receivables to increase cash flow.
a
The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation. A. fixed costs B. variable costs C. marginal costs D. semi-variable costs
a
The following are the expected one-year T-bill rates for the next four years: 3%, 4%, 5%, and 6%. According to the basic model of the expectations hypothesis, what would you expect the rate for three-year securities to be? A. 4% B. 4.5% C. 6% D. 3.75%
a
The pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for A. change in retained earnings. B. gross profit. C. interest expense. D. prepaid expenses.
a
The term structure of interest rates A. changes daily to reflect current competitive conditions in the money and capital markets. B. plots returns for securities of different risk. C. shows the relative interest rate spread between bonds with different risk ratings such as AAA, AA, A, BBB, and so on. D. depicts interest rates for T-bills over the last year.
a
The term structure of interest rates is influenced by A. inflation. B. the money supply. C. Federal Reserve activities. D. All of the options
a
The theory of the term structure of interest rates, which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding, is the A. expectations hypothesis. B. segmentation theory. C. liquidity premium theory. D. market average rate theory.
a
When a firm employs no debt A. it has a financial leverage of one. B. it has a financial leverage of zero. C. its operating leverage is equal to its financial leverage. D. it will not be profitable.
a
When the cost of raw materials is increasing, FIFO accounting A. yields higher ending inventory values than LIFO. B. produces higher unit sales than using LIFO. C. yields higher cost of goods sold than LIFO. D. All of the options.
a
When the term structure of interest rates is downward sloping and interest rates are expected to decline, the A. financial manager generally borrows short-term. B. financial manager borrows at the lower long-term rates. C. corporation's ratio of short-term to long-term debt is low. D. None of the options
a
When the yield curve is upward sloping, generally a financial manager should A. utilize long-term financing. B. utilize short-term financing. C. wait for future financing. D. lease.
a
Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings? A. Illiquid assets and heavy short-term borrowing B. Illiquid assets and heavy long-term borrowing C. Liquid assets and heavy long-term borrowing D. Liquid assets and heavy short-term borrowing
a
Which of the following yield curves would be characteristic during a period of high economic growth? A. Upward sloping B. Downward sloping C. Horizontal D. Humped
a
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Refer to the figure above. The degree of operating leverage is _____. A. 1.40x B. 1.56x C. 3.33x D. 2.22x
a
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Refer to the figure above. This firm's break-even point is A. 445 units. B. 634 units. C. 714 units. D. 180 units.
a
A "normal" term structure of interest rates would depict A. short-term rates higher than long-term rates. B. long-term rates higher than short-term rates. C. no general relationship between short- and long-term rates. D. intermediate rates (one to five years) lower than both short-term and long-term rates.
b
A conservative financing plan involves A. heavy reliance on debt. B. heavy reliance on equity. C. a high degree of financial leverage. D. a high degree of combined leverage.
b
A firm has beginning inventory of 400 units at a cost of $12 each. Production during the period was 700 units at $13 each. If sales were 800 units, what is the value of the ending inventory using LIFO? A. $2,750 B. $3,600 C. $3,300 D. $3,850
b
A firm has targeted a 20% growth in sales this year. Last year's cash as a percent of sales was 10%, accounts receivable 30%, and inventory 25%. What percentage growth in current liabilities is required to support the growth in sales under the percent-of-sales forecasting method? A. 32% B. 13% C. 8% D. Not enough information to determine
b
A firm will usually increase the ratio of short-term debt to long-term debt when A. short-term debt has a lower cost than long-term equity. B. the term structure is inverted and expected to shift down. C. the term structure is upward sloping and expected to shift up. D. the firm is undertaking a large capital budgeting project.
b
A highly automated plant would generally have A. more variable than fixed costs. B. more fixed than variable costs. C. all fixed costs. D. all variable costs.
b
A rapid rate of growth in sales may require A. higher dividend payments to shareholders. B. increased borrowing by the firm to support the sales increase. C. the firm to be more lenient with credit customers. D. sales forecasts to be made less frequently.
b
An aggressive, risk-oriented firm will likely A. borrow long-term and carry low levels of liquidity. B. borrow short-term and carry low levels of liquidity. C. borrow long-term and carry high levels of liquidity. D. borrow short-term and carry high levels of liquidity.
b
An inverted yield curve would suggest that A. interest rates are expected to rise. B. interest rates are expected to fall. C. inflation is expected to rise in the future. D. long-term rates are being pushed up by Federal Reserve policy.
b
Combined leverage is concerned with the relationship between A. changes in EBIT and changes in EPS. B. changes in volume and changes in EPS. C. changes in volume and changes in EBIT. D. changes in EBIT and changes in net income.
b
Conservatively leveraged Firm C and highly leveraged Firm H operate at the same level of earnings before interest and taxes where the return on assets is greater than the cost of debt. A. Firm C will have a higher return on equity than H. B. Firm H will have a higher return on equity than C. C. The return on equity will not be affected by financial leverage. D. The return on equity will be the same at an equal level of earnings.
b
During tight money periods A. long-term rates are higher than short-term rates. B. short-term rates are higher than long-term rates. C. short-term rates are equal to long-term rates. D. the relationship between short- and long-term rates remains unchanged.
b
Financial leverage deals with A. the relationship of fixed and variable costs. B. the relationship of debt and equity in the capital structure. C. the entire income statement. D. the entire balance sheet.
b
Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 7.5%, and with a long-term financing plan their rate will be 9%. By how much will their earnings after taxes change if they choose the more conservative financing plan instead of the more aggressive plan? A. $10,000 B. ($10,800) C. ($6,000) D. $6,000
b
If EBIT equals $200,000 and interest equals $40,000, what is the degree of financial leverage? A. 5.33x B. 1.25x C. .8125x D. 4.33x
b
If a firm has fixed costs of $30,000, a variable cost per unit of $.75, and a break-even point of 5,000 units, the price is _____. A. $2.50 B. $6.75 C. $4.00 D. $4.50
b
If a firm has fixed costs of $60,000, a price of $7.00, and a break-even point of 25,000 units, the variable cost per unit is _____. A. $5.00 B. $4.60 C. $5.40 D. $4.00
b
If a firm with $49,000 in fixed costs breaks even on unit sales of 7,000, how many units must the firm sell to earn $30,000 in operating profit? A. 30,000 units B. 11,286 units C. 15,824 units D. There is not enough information to determine the unit sales required.
b
If sales volume exceeds the break-even point, the firm will experience A. an operating loss. B. an operating profit. C. an increase in plant and equipment. D. an increase in stock price.
b
In a cash budget, the cumulative cash balance is equal to A. net cash flow minus the beginning cash balance. B. net cash flow plus the beginning cash balance. C. the cumulative loan balance minus the ending cash balance. D. the cumulative loan balance plus the ending cash balance.
b
In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the A. pro forma income statement. B. cash budget. C. prior balance sheet. D. statement of retained earnings.
b
In general, the larger the portion of a firm's sales that are on credit, the A. lower will be the firm's need to borrow. B. higher will be the firm's need to borrow. C. more rapidly credit sales will be paid off. D. more the firm can buy raw materials on credit.
b
In order to estimate production requirements, we A. add beginning inventory to projected sales in units and subtract desired ending inventory. B. add projected sales in units to desired ending inventory and subtract beginning inventory. C. add beginning inventory to desired ending inventory and divide by two. D. add beginning inventory to desired ending inventory and subtract projected sales in units.
b
In the construction of the cash payments schedule, the major cash payment is generally A. the general and administrative expense. B. costs associated with inventory manufactured. C. interest and dividends. D. payments for new plant and equipment.
b
In the development of the pro forma financial statements, the last step in the process is the development of the A. cash budget. B. pro forma balance sheet. C. pro forma income statement. D. capital budget.
b
Pressure to increase current asset buildup often results from A. a decline in sales growth. B. rapidly expanding sales. C. increased demands of short-term creditors. D. None of the options
b
Publishing companies are characterized by A. fluctuating production to match sales. B. seasonal sales. C. low inventories due to computer inventory management. D. fluctuating production to match sales and seasonal sales.
b
Riley Co. is considering a short-term or long-term financing plan for $4,000,000 in assets. They expect the following one-year rates over the next three years: 6.5%, 7.75%, and 9%. Their long-term interest rate will be 7.5% for the three years. Assuming the rates follow their expectations, what will be the difference in interest costs over the three years? A. Long-term interest will be $30,000 more than short-term interest. B. Long-term interest will be $30,000 less than short-term interest. C. Long-term interest will be $140,000 less than short-term interest. D. None of the options
b
Samuelson will produce 20,000 units in January using level production. If each unit costs $500 to manufacture, what is the dollar value of ending inventory in January if beginning inventory is 10,000 units and January sales are 15,000? A. Less than $5,000,000 B. Between $5,000,000 and $10,000,000 C. Greater than $10,000,000 D. There will be a shortage.
b
Some analysts believe that the term structure of interest rates is determined by the behavior of various types of financial institutions. This theory is called the A. expectations hypothesis. B. market segmentation theory. C. liquidity premium theory. D. theory of industry supply and demand for bonds.
b
The concept of a self-liquidating asset implies that A. the working capital associated with a product will be liquidated within a one-year period. B. all the product will be sold, receivables collected, and bills paid over the time period specified. C. assets associated with the production of a product will be liquidated over the depreciable life of the assets. D. self-liquidating assets will be financed by long-term sources of capital.
b
Under normal conditions (70% probability), Plan A will produce a $20,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $100,000 less than Plan B. What is the expected value of return? A. $28,000 B. ($16,000) C. $58,000 D. ($2,000)
b
Under which of the following conditions could the overuse of financial leverage be detrimental to the firm? A. In a stable industry. B. When there is cyclical demand for the firm's products. C. During an upswing in the business cycle. D. When there is low interest cost compared to return on assets.
b
Which of the following is not a condition under which a prudent manager would accept some risk in financing? A. Predictable cash-flow patterns B. Inventory is highly perishable. C. The price of inventory is stable. D. Basic access to capital markets
b
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Refer to the figure above. The degree of operating leverage (DOL) is _____. A. 1.62x B. 1.80x C. 3.50x D. 1.40x
b
A factory that relies on highly technical machinery may choose to reduce its overall leverage position by A. selling its machinery. B. increasing its accounts receivable. C. utilizing a higher level of equity. D. decreasing their variable costs per unit.
c
A firm has operating profit of $15,000 on unit sales of 10,000 units. Fixed costs are $30,000. What is the firm's break-even sales level? A. Less than 6,000 units. B. 6,000 units. C. More than 6,000 units D. There is not enough information to determine the unit break-even point.
c
An aggressive working capital policy would have which of the following characteristics? A. A high ratio of long-term debt to fixed assets B. A low ratio of short-term debt to fixed assets C. A high ratio of short-term debt to long-term sources of funds D. A short average collection period
c
Assuming level production throughout the year, and assuming receivables are collected in two equal installments over the two months subsequent to the sales period, developing the related areas of the cash budget requires which of the following steps? A. Calculate beginning accounts receivable balance. B. Calculate COGS. C. Estimate monthly net cash flow and bank borrowing or repayments. D. Calculate ending inventory.
c
At the break-even point, a firm's profits are A. greater than zero. B. less than zero. C. equal to zero. D. Not enough information is given to determine.
c
Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true? A. A has a lower break-even point than B, but A's profit grows faster after the breakeven. B. A has a higher break-even point than B, but A's profit grows slower after the breakeven. C. B has a lower break-even point than A, but A's profit grows faster after the breakeven. D. B has a lower break-even point than A, and profit grows the same rate for both companies after the break-even point.
c
Firm A produces semiconductors using highly technical machinery; Firm B is a retail clothing store. Consider which firm employs a higher degree of operating leverage and then answer the following question: "Which of the following comparative statements about firms A and B is true?" A. A has a lower break-even point than B, but A's profit grows faster after the breakeven. B. A has a higher break-even point than B, but A's profit grows slower after the breakeven. C. B has a lower break-even point than A, but A's profit grows faster after the breakeven. D. B has a lower break-even point than A, and profit grows at the same rate for both companies after the break-even point.
c
Frisch Fish Corp expects net income next year to be $750,000. Inventory and accounts receivable will have to be increased by $650,000 to accommodate this sales level. Frisch will pay dividends of $300,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities? A. No external financing is required. B. $100,000 C. $200,000 D. $300,000
c
Green Co. has total assets $400,000, a cost of borrowed funds of 6%, and an EBIT of $42,500. From a financial break-even perspective, Green Co. is A. breaking even. B. lower than the breakeven point. C. higher than the break-even point. D. in need of new financing.
c
Ideally, which of the following type of assets should be financed with long-term financing? A. Fixed assets only B. Fixed assets and temporary current assets C. Fixed assets and permanent current assets D. Temporary and permanent current assets
c
If a firm has a price of $6.00, a variable cost per unit of $4.00, and a break-even point of 40,000 units, fixed costs are equal to _____. A. $27,000 B. $90,000 C. $80,000 D. $50,000
c
If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then A. DOL equals 1, and DFL equals 0. B. DOL equals 0, and DFL equals 1. C. DOL equals 1, and DFL equals 1. D. None of the options
c
If projected net cash outflow for November is ($10,000), the beginning cash balance is $4,000, the minimum cash balance is $3,000, and the beginning loan balance is $8,000, what will be the cumulative loan balance at the end of November? A. $14,000 B. $5,000 C. $17,000 D. $22,000
c
In calculating gross profits, a firm utilizing FIFO inventory accounting would assume that A. all sales were from current production. B. all sales were from beginning inventory. C. sales were from beginning inventory until it was depleted, and then would use sales from current production. D. all sales were for cash.
c
In calculating gross profits, a firm utilizing LIFO inventory accounting would assume that A. all sales were from current production. B. all sales were from beginning inventory. C. sales were from current production until current production was depleted, and then would use sales from beginning inventory. D. all sales were for cash.
c
Net cash flow is equal to A. income after taxes minus depreciation. B. income after taxes minus dividends. C. cash receipts minus cash payments. D. cash receipts minus cash payments minus depreciation.
c
Permanent current assets are not a factor in a manager's decision-making process when all current assets will be A. financed by short-term debt. B. long-term in nature. C. self-liquidating. D. internally financed.
c
Retail companies like Target and Limited Brands are more likely to have A. stable sales and earnings per share. B. cyclical sales but less volatile earnings per share. C. cyclical sales and more volatile earnings per share. D. cyclical sales but stable accounts receivable and inventory.
c
Retail companies like Target and Limited Brands exhibit sales patterns that are most typically influenced by A. cyclical economic indicators. B. competitive prices. C. seasonality. D. sales promotions.
c
The belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the A. expectations hypothesis. B. market segmentation theory. C. liquidity premium theory. D. market credit crunch theory.
c
The degree of financial leverage is concerned with the relationship between A. changes in volume and changes in EPS. B. changes in volume and changes in EBIT. C. changes in EBIT and changes in EPS. D. changes in EBIT and changes in operating income.
c
The difference between total receipts and total payments is referred to as A. cumulative cash flow. B. beginning cash flow. C. net cash flow. D. cash balance.
c
The key initial element in developing all pro forma statements is A. a cash budget. B. an income statement. C. a sales forecast. D. a collections schedule.
c
The need for an increase or decrease in short-term borrowing can be predicted by A. ratio analysis. B. trend analysis. C. a cash budget. D. an income statement.
c
The percent-of-sales method of financial forecasting A. is more detailed than a cash budget approach. B. requires more time than a cash budget approach. C. assumes that balance sheet accounts maintain a constant relationship to sales. D. provides a month-to-month breakdown of data.
c
The term "permanent current assets" implies A. the same thing as fixed assets. B. nonmarketable assets. C. some minimum level of current assets that are not self-liquidating. D. inventory.
c
U.S. government securities are used to construct yield curves because A. they are free of default risk. B. the large number of maturities form a continuous curve. C. they are free of default risk and the large number of maturities form a continuous curve. D. None of the options
c
Well-implemented Web-based supply chain management has all of the following benefits except A. it reduces inventory on hand. B. it speeds up the ordering and delivery process. C. it reduces the number of suppliers bidding for a company's business. D. it decreases overall costs.
c
When using the percent-of-sales method in forecasting the funds needed, which of the following is not true? A. As the dividend payout ratio increases, the required new funds also increase. B. Required new funds decrease as profit margin increases. C. Required new funds increase as the dividend payout decreases. D. As the tax rate increases, the required new funds increase.
c
Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings? A. Illiquid assets and heavy short-term borrowing B. Illiquid assets and heavy long-term borrowing C. Liquid assets and heavy long-term borrowing D. Liquid assets and heavy short-term borrowing
c
Which of the following is concerned with the change in operating profit as a result of a change in volume? A. Financial leverage B. Break-even point C. Operating leverage D. Combined leverage
c
Which of the following is most likely to increase the final number for notes payable for short-term borrowing needs in the pro forma balance sheet? A. A decrease in inventory. B. An increase in retained earnings. C. A decrease in accounts payable. D. A decrease in accounts receivable.
c
Which of the following is not true about leverage? A. Operating leverage influences the top half of the income statement, determining EBIT. B. Financial leverage deals with the bottom half of the income statement, determining EPS. C. Combined leverage utilizes the entire income statement, showing the impact of change in volume on EBIT. D. None of the options
c
Working capital management is primarily concerned with the management and financing of A. cash and inventory only. B. current assets and current liabilities. C. current assets. D. receivables and payables.
c
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Refer to the figure above. The degree of combined leverage (DCL) is _____. A. 3.08x B. 5.45x C. 2.25x D. 6.83x
c
XYZ Co. has forecasted June sales of 400 units and July sales of 700 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production? A. 750 units B. 0 units C. 775 units D. 425 units
c
58. A firm has forecasted sales of $4,500 in April, $3,000 in May, and $5,000 in June. All sales are on credit. 30% is collected in the month of the sale, and the remainder in the following month. What will be the balance in accounts receivable at the beginning of July? A. $1,950 B. $6,500 C. $4,550 D. $3,500
d
A conservatively financed firm would A. use long-term financing for all fixed assets and short-term financing for all other assets. B. finance a portion of permanent assets and short-term assets with short-term debt. C. use equity to finance fixed assets, use long-term debt to finance permanent assets, and use short-term debt to finance fluctuating current assets. D. use long-term financing for permanent current assets, fixed assets, and a portion of the short-term fluctuating assets, and use short-term financing for all other short-term assets.
d
A financial executive devotes the most time to A. long-range planning. B. capital budgeting. C. short-term financing. D. working capital management.
d
A firm's break-even point will rise if A. fixed costs decrease. B. contribution margin increases. C. price per unit rises. D. variable cost per unit rises.
d
A firm's earnings per share is not impacted by its financing plan at the point when A. debt is equal to equity. B. return on assets equals return on equity. C. the cost of borrowed funds equals the return on equity. D. the cost of borrowed funds equals the return on assets.
d
A high DOL means A. there are high labor costs. B. there is high debt. C. there is a large amount of equity. D. there are high fixed costs.
d
As the economy moves through a business cycle, which of the following "term structure of interest rates" theories dominates the shape of the yield curve. A. The expectations hypothesis B. The market segmentation theory C. The liquidity premium theory D. None of these theories dominate the shape of the yield curve.
d
Financial managers can accurately predict future interest rates by A. calculating the anticipated inflation rate. B. gauging the Fed's decision regarding the target federal funds rate. C. measuring investor sentiment and consumer confidence indices. D. None of the options
d
Firms with a high degree of operating leverage are A. easily capable of surviving large changes in sales volume. B. usually trading off lower levels of risk for higher profits. C. significantly affected by changes in interest rates. D. trading off higher fixed costs for lower per-unit variable costs.
d
From Finance in Action - Global, we can correctly assume that A. Japanese firms routinely employ high financial leverage. B. Japanese firms prefer a position of low operating leverage. C. Japanese firms tend to react aggressively to volume changes. D. Japanese firms routinely employ high financial leverage and tend to react aggressively to volume changes.
d
Generally, more use is made of short-term financing because A. short-term interest rates are generally lower than long-term interest rates. B. most firms do not have basic access to the capital markets. C. short-term financing is usually more predictable than long-term financing. D. short-term interest rates are generally lower than long-term interest rates and most firms do not have basic access to the capital markets.
d
Genetech has $4,000,000 in assets. It has decided to finance 30% with long-term financing (9% rate) and 70% with short-term financing (7%) rate. What will be its annual interest costs? A. $78,000 B. $126,000 C. $440,000 D. $304,000
d
Heavy use of long-term debt may be beneficial in an inflationary economy because A. the debt may be repaid in more "expensive" dollars. B. nominal interest rates exceed real interest rates. C. inflation is associated with the peak of a business cycle. D. the debt may be repaid in "cheaper" dollars.
d
If fixed costs rise while other variables stay constant A. the break-even point rises. B. the degree of operating leverage increases. C. total profit declines. D. All of the options
d
In developing the pro forma income statement, we follow four important steps: 1) Compute other expenses. 2) Determine a production schedule. 3) Establish a sales projection. 4) Determine profit by completing the actual pro forma statement. What is the correct order for these four steps? A. 1,2,3,4 B. 3,2,4,1 C. 2,1,3,4 D. 3,2,1,4
d
In financial statements, the number of units shown in cost of goods sold as compared to the number of the units actually produced A. is higher. B. is lower. C. is the same. D. can be either higher or lower.
d
In forecasting a firm's cash needs for some future period A. the percent-of-sales method is a "broad-brush" approach. B. cash budgets are more exact than the percent-of-sales method. C. a cash budget approach can deal effectively with both level and seasonal production schedules. D. All of the options.
d
In the percent-of-sales method, if (A/S) and (L/S) both increase, A. RNF stays the same. B. RNF goes down. C. RNF goes up. D. More information is needed.
d
In using a systems approach to financial planning, it is necessary to develop a A. pro forma income statement. B. cash budget. C. pro forma balance sheet. D. All of the options.
d
MG Lighting had sales of 500 units at $100 per unit last year. The marketing manager projects a 15 percent decrease in unit volume this year because a 10 percent price increase is needed to pass rising costs through to customers. Returned merchandise will represent 3.2 percent of total sales. What is your net dollar sales projection for this year? A. $26,976 B. $69,344 C. $72,800 D. None of the options.
d
Pro forma financial statements are A. the most comprehensive means of financial forecasting. B. often required by prospective creditors. C. projections of financial statements for a future period. D. All of the options.
d
RFID chips have been used to A. track livestock. B. track marathon runners' times. C. track inventory at retailers. D. All of the options
d
Required production during a planning period will depend on the A. beginning inventory of products. B. sales during the period. C. desired level of ending inventory. D. All of the options.
d
The break-even point can be calculated as A. variable costs divided by contribution margin per unit. B. total costs divided by contribution margin per unit. C. variable costs times contribution margin per unit. D. fixed costs divided by contribution margin per unit.
d
The degree of operating leverage is computed as A. percent change in operating profit divided by percent change in net income. B. percent change in unit volume divided by percent change in operating profit. C. percent change in EPS divided by percent change in operating income. D. percent change in operating income divided by percent change in unit volume.
d
The degree of operating leverage may be defined as A. the percent change in operating income divided by the percent change in unit volume. B. Q(P - VC) divided by Q(P - VC) - FC. C. S - TVC divided by S - TVC - FC. D. All of the options
d
The term structure of interest rates A. is an indication of investors' expectations about inflation and future interest rates. B. will be downward sloping if short-term interest rates are higher than long-term rates. C. will be upward sloping under normal conditions. D. All of the options
d
The term structure of interest rates A. is often referred to as the yield curve. B. depicts the relative level of short- and long-term interest rates. C. is usually constructed with U.S. government securities of varying maturities. D. All of the options
d
The use of cash budgeting procedures A. helps the firm plan its current asset levels for a given production plan. B. makes managing inventory easier under seasonal production. C. illustrates fluctuating levels of current assets for a given production plan. D. All of the options are correct.
d
Tinbergen Cans expects sales next year to be $50,000,000. Inventory and accounts receivable (combined) will increase $8,000,000 to accommodate this sales level. The company has a profit margin of 6 percent and a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing. A. No external financing will be needed. B. Less than $1,000,000 of external financing is needed. C. Between $1,000,000 and $5,000,000 of external financing is needed. D. More than $5,000,000 of external financing is needed.
d
Under normal conditions (60% probability), Financing Plan A will produce a $30,000 higher return than Plan B. Under tight money conditions (40% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of return? A. $2,800 B. $4,000 C. $4,800 D. $2,000
d
When actual sales are greater than forecasted sales A. inventory will decline. B. production schedules might have to be revised upward. C. accounts receivable will rise. D. All of the options
d
When the yield curve is downward sloping, generally a financial manager should A. expect an economic boom. B. utilize long-term financing. C. increase investment and the level of financing overall. D. utilize short-term financing.
d
Which of the following is a reason for diminishing liquidity in modern corporations? A. Just-in-time inventory programs B. Better utilization of cash via computers C. Increased use of point-of-sale terminals D. All of the options are reasons for diminishing liquidity.
d
Which of the following is true about the concept of leverage? A. At the break-even point, operating leverage is equal to zero. B. Combined leverage measures the impact of operating and financial leverage on EBIT. C. Financial leverage measures the impact of fixed costs on earnings. D. None of the options
d
Which of the following questions does break-even analysis attempt to address? A. How much do changes in volume affect costs and profits? B. At what point does the firm break even? C. What is the most efficient level of fixed assets to employ? D. All of the options
d
Which of the following techniques allows explicit consideration of more than one possible outcome? A. Operating leverage B. Present value C. Least-squares regression D. Expected value
d
Wiggles Right forecasted sales of $5,000 in October, $4,000 in November, and $4,000 in December. All sales are on credit. 40% is collected in the month of the sale, and the remainder in the following month. How much is collected from accounts receivable in November? A. $5,400 B. $4,800 C. $6,000 D. $4,600
d
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Refer to the figure above. The degree of combined leverage is _____. A. 2.22x B. 1.90x C. 2.95x D. 1.65x
d
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Refer to the figure above. The degree of financial leverage (DFL) is _____. A. 3.50x B. 1.40x C. 1.95x D. 1.25x
d
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Refer to the figure above. The degree of financial leverage is _____. A. 1.29x B. 4.20x C. 3.50x D. 1.18x
d
Yield curves change daily to reflect A. changing conditions in the money and capital markets. B. new inflation expectations. C. changing conditions in the overall economy. D. All of the options
d
A "risky" financial plan will use long-term financing for fixed assets, permanent current assets, and a portion of temporary current assets. True False
f
A cash budget is unnecessary under level production since we know how much will be produced every month. True False
f
A lower price for the firm's product will reduce the firm's break-even point. True False
f
According to the expectations hypothesis, the expected value is the sum of the probabilities of all expected events. True False
f
According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, long-term rates are expected to decline. True False
f
An example of an adjustment for a cash break-even analysis would be adding back increases in accounts receivable. True False
f
An increase in accounts receivable and a decrease in accounts payable will usually reduce the amount of new external funds required. True False
f
An increase in sales and profits generates the necessary cash required for economic growth. True False
f
An increase in sales and/or profits means there is also an increase in cash on the balance sheet. True False
f
As the dividend payout ratio declines, more external funds are required. True False
f
By using long-term capital to cover short-term needs, the firm is virtually assured of becoming technically insolvent. True False
f
Cash, accounts receivables, and inventory all move monthly in the same direction under level production. True False
f
Compared to a firm operating at 100% of capacity, firms that are operating at less than full capacity will require greater new external funds when sales increase. True False
f
Contribution margin is equal to fixed costs minus variable costs. True False
f
Degree of combined leverage considers the impact of a change in volume on the change in operating income. True False
f
Expected value analysis requires taking the difference between the actual projected outcome and the historic outcome times its probability and then summing these totals. True False
f
Financial leverage primarily affects the left-hand side of the balance sheet. True False
f
Firms with cyclical sales should employ a high degree of leverage. True False
f
Firms with predictable cash-flow patterns should assume relatively low levels of risk. True False
f
For firms in industries that offer some degree of stability, are in a positive stage of growth, and are operating in favorable economic conditions, the use of debt is not needed or recommended. True False
f
Generally, a downward sloping yield curve indicates an imminent economic boom. True False
f
Generally, the pro forma income statement and balance sheet must be created before the cash budget is completed. True False
f
Growth in sales volume prevents a shortage of funds. True False
f
Heavy risk exposure due to short-term borrowing can be compensated for by carrying illiquid assets. True False
f
Heavy use of long-term financing generally leads to lower financing costs. True False
f
Ideally, permanent current assets should be financed exclusively with short-term borrowings. True False
f
If Product Corp has beginning inventory of 100 units, projected sales of 400 units, and desired ending inventory of 200 units, production must be planned for 300 units. True False
f
If a firm has a DFL of 2.0, EPS will change 2% for every 1% change in volume. True False
f
If economic conditions were expected to be favorable, an investor would likely prefer a firm with a low degree of leverage. True False
f
If we examine the ratio of working capital to sales, we can see that for the last several decades, firms' liquidity has been increasing. True False
f
In order to conduct a cash break-even analysis, the analyst must add back depreciation from fixed costs. True False
f
In periods of tight money, long-term rates are typically higher than short-term rates. True False
f
Increasing financial leverage will always lead to higher EPS because it reduces the number of shares outstanding. True False
f
Interest rates and inflation are inversely related. True False
f
It is not necessary to understand interest rate movements when deciding the structure of short-term debt relative to long-term debt. True False
f
Liquidating current assets are really fixed assets since they have lives greater than one year. True False
f
Long-term financing is usually less expensive than short-term financing because it is not as advantageous to the corporation as short-term financing. True False
f
Lower profit margins resulting from increased competition would mean a lower need for external funds. True False
f
Only the market segmentation theory has any significant impact on interest rates. True False
f
Operating income is not the same thing as EBIT. True False
f
Operating leverage determines how income from operations is to be divided between debt holders and stockholders. True False
f
Operating leverage influences the bottom half of the income statement while financial leverage deals with the top half. True False
f
Permanent current assets are not similar to fixed assets because they are fully liquidated within the year. True False
f
Production planning depends upon the beginning and ending accounts receivable levels, as well as the projected monthly sales level. True False
f
Profit is generally adequate to finance significant growth. True False
f
Property taxes and depreciation expense are examples of variable costs. True False
f
Short-term interest rates are more dependent upon inflation than on current demand for money. True False
f
Supply chain management has little impact on financial performance and is primarily a marketing and management concept. True False
f
The "term structure of interest rates" depicts the competitive cost of funds for the various short-term sources of funds such as Treasury bills, commercial paper, and bank CDs. True False
f
The "term structure of interest rates" is a schedule that tells when a company's bonds mature and shows how many dollars a firm must pay in interest payments. True False
f
The aggressive financing plan involves utilizing long-term financing for permanent and temporary current assets. True False
f
The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a constant relationship to cash. True False
f
The closer a firm is to its break-even point, the lower the degree of operating leverage it will be. True False
f
The contribution margin is equal to sales price per unit minus total costs per unit. True False
f
The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage. True False
f
The degree of financial leverage is not influenced by the interest rate on debt, only the amount borrowed. True False
f
The degree of operating leverage is a number indicating the relationship between the percentage change in sales to the percentage change in earnings per share. True False
f
The faster a firm's growth in sales, the more likely it is that an increasing percentage of financing will be internally generated. True False
f
The finance department should work independently without input from other departments because there may be significant biases when creating pro formas. True False
f
The financial manager generally needs to devote little time to management of working capital. True False
f
The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due. True False
f
The most significant purpose of the cash budget is to plan accounts payable payments. True False
f
The percent-of-sales forecast is likely to be most accurate when used with cyclical companies. True False
f
The percent-of-sales provides the most accurate and detailed method of forecasting necessary funds. True False
f
The primary purpose of the cash budget is to forecast income. True False
f
The successful financial manager is very interested in the term structure of interest rates but is not concerned with the relative volatility or historical level of interest rates. True False
f
Total production costs should be equal to cost of goods sold in the pro forma income statement. True False
f
Use of long-term financing and the carrying of highly liquid assets is a high-risk combination. True False
f
Walmart requires manufacturers to ship goods with RFID tags so it can better track inventory and reduce the need for supply chain management. True False
f
When using level production, inventory will peak in the month where unit sales trend above the planned production level. True False
f
Working capital management is relatively unimportant for a small business. True False
f
Working capital management primarily involves long-term planning. True False
f
Yield curves change very little in the short run (three months). True False
f
"Operating leverage" is the use of fixed costs to magnify returns at high levels of operation. True False
t
A firm with a high degree of combined leverage will, other things being equal, experience higher earnings in the expansionary part of the business cycle. True False
t
A firm with a high degree of financial leverage could face financial difficulty even though it is in a stable industry. True False
t
A firm's cash borrowing needs can be reduced if its inventory turnover rate can be increased. True False
t
A higher growth rate in sales will often require more external funds. True False
t
A lower dividend payout ratio will decrease the firm's need for borrowing. True False
t
A pro forma balance sheet needs data from the prior balance sheet and the cash budget. True False
t
According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, short-term rates are expected to rise. True False
t
An increase in sales accompanied by an increase in accounts payable will reduce the amount of new external funds required, all else being equal. True False
t
As a general rule, it is desirable to finance the permanent assets, including "permanent current assets," with long-term debt and equity. True False
t
As the contribution margin rises, the break-even point goes down. True False
t
Cash break-even analysis eliminates the depreciation expense and other non-cash charges from fixed costs. True False
t
Companies generally prefer to maintain some minimum cash balance. True False
t
Degree of operating leverage should be computed only over a profitable range of operations. True False
t
During an economic "boom" period, a shortage of low-cost financing alternatives exists. True False
t
During tight money periods, short-term financing may be difficult to find. True False
t
Expected value analysis involves assigning "weights" to various expected future outcomes by their respective probabilities of occurrence. True False
t
Expected value techniques allow consideration of more than one possible outcome. True False
t
Financial leverage breakeven occurs when return on total assets is equal to the cost of borrowed funds. True False
t
Financial leverage emphasizes the impact of using debt in the business. True False
t
Firms with highly volatile and perishable inventory should assume relatively low levels of risk. True False
t
For Japanese firms that have high levels of operating and financial leverage, maintaining sales volume is of critical importance even at the cost of price. True False
t
Heavy use of long-term financing can generate more profit for the company during a tight money period. True False
t
If the liquidity premium theory were the only correct theory, yield curves would always be upward-sloping. True False
t
Immediate access to capital markets allows greater risk-taking capability. True False
t
Increased use of long-term financing is generally a more conservative approach to current asset financing. True False
t
It is helpful to break down the income statement into smaller monthly periods to enable evaluation of seasonal patterns of cash inflows and outflows. True False
t
Level production methods smooth production schedules and utilize manpower and equipment more efficiently than seasonal production methods. True False
t
Level production schedules usually have the advantage of reducing overall production costs. True False
t
Linear break-even analysis and operating leverage are only valid within a relevant range of production. True False
t
Linear break-even analysis assumes that costs are linear functions of volume. True False
t
Management should tailor the use of leverage to meet its own risk-taking desires. True False
t
Managers who are risk-averse and uncertain about the future would most likely minimize combined leverage. True False
t
Many companies such as McDonald's have embraced supply chain management using Web-based procedures. True False
t
One of the primary benefits of implementing supply chain management is a reduction in inventory on hand. True False
t
Operating leverage emphasizes the impact of using fixed assets in the business. True False
t
Operating leverage primarily affects the left-hand side of the balance sheet, while financial leverage affects the right-hand side of the balance sheet. True False
t
Operating leverage will change when a firm alters the mix of fixed capital resources and variable labor that it uses. True False
t
Operating leverage works best when volume is increasing. True False
t
Pro forma income statements and balance sheets refer to projected financial statements. True False
t
Pro forma income statements follow a sales forecast and a production plan. True False
t
Pro forma statements are generally prepared six months to a year into the future. True False
t
Sales commissions and raw materials are variable costs. True False
t
Sales projections and the ability to accurately predict the future have a large impact on cash flow targets. True False
t
Short-term financing is risky because of the possibility of rising short-term rates and the inability of always being able to refund short-term debt. True False
t
Short-term interest rates are generally lower than long-term interest rates. True False
t
Short-term interest rates have historically been more volatile than long-term rates. True False
t
The "term structure of interest rates" refers to the relationship between yields on debt and their maturities. True False
t
The behavior of various kinds of financial institutions determines the shape of the yield curve, according to the market segmentation theory. True False
t
The calculation of cash receipts requires a breakout of cash and credit sales and collections history. True False
t
The cash budget combines the cash receipts and cash payments schedules in determining cash flow. True False
t
The degree of financial leverage measures the percentage change in EPS for every 1% move in EBIT. True False
t
The interwoven boundaries of banks and different trading companies in Japan make it easier to acquire credit in Japan than in the U.S. True False
t
The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales forecast. True False
t
The more short-term financing there is relative to long-term financing, the riskier the financial structure. True False
t
The percent-of-sales method for financial forecasting assumes that balance sheet accounts maintain a relatively constant relationship to sales. True False
t
The percent-of-sales method would be more accurate under a steady sales assumption than with cyclical sales. True False
t
The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding or excess funds to be invested. True False
t
The ratio of long-term financing to short-term financing at any given time will be greatly influenced by the term structure of interest rates. True False
t
The three most important factors when selecting a financing plan are risk, asset liquidity, and timing. True False
t
The use of point-of-sale terminals has made it easier for many retail store managers to manage their inventory. True False
t
The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold. True False
t
Use of financial leverage must consider risk, not just maximizing profit. True False
t
