Financial Management (A.

Financial Planning & Strategies)

MODULE 11 FINANCIAL MANAGEMENT A. FINANCIAL PLANNING AND STRATEGIES THEORIES: Business plan 3. The typical outline of the component parts of a business plan would be the A. mission and strategy statements. C. financial projections. B. operations of the business. D. All of the above. Financial planning process 2. Planning for future growth is called: A. capital budgeting C. financial forecasting B. working capital management D. none of the above 1. The ideal financial planning process would be A. top-down planning. B. bottom-up planning. C. a combination of top-down and bottom-up planning. D. none of the above. 18.Which of the following is incorrect regarding the construction of financial planning models? A. There is no theory or model that leads straight to the optimal financial strategy. B. Financial planning should not proceed by trial and error. C. Many different strategies may be projected under a range of assumptions about the future before one strategy is finally chosen. D. The dozens of separate projections that may be made during this trial-and-error process generate a heavy load of arithmetic and paperwork.

Financing policy Maturities matching 23.When a firm finances long-term assets with short-term sources of funding, it: A. reduces the risk of cash shortage B. will have higher interest expenses C. improves the leverage ratio D. is ignoring the principle of matched maturities Short-term financing 14.The type of company most likely to need short-term financing is one that A. has no seasonality and no growth in sales from year to year B. sells only for cash C. has a high degree of seasonality D. has lower total fixed costs than total variable costs 25.Common sources of short-term financing include: A. Stretching payables C. Reducing inventory B. Issuing bonds D. All of the above 24.How does long-term financing policy affect short-term financing requirements? A. The nature of the firm's short-term financial planning problem is determined by the amount of long-term capital it raises. B. A firm that issues large amounts of long-term debt or common stock, or that retains a large part of its earnings, may find that it has permanent excess cash. Other firms raise relatively little long-term capital and end up as permanent short-term debtors. C. Most firms attempt to find a golden mean by financing all fixed assets and part of current assets with equity and long-term debt. Such firms may invest cash surpluses during part of the year and borrow during the rest of the year. D. All of the above affect short-term financing. Judgmental approach


All balance sheet accounts are tied directly to sales. B. Understate profits when sales are decreasing and overstate profits when sales are increasing. as long as fixed costs are present. the “plug” figure required to bring the statement into balance may be called the A. Statements a and c above are correct.The percent-of-sales method of preparing the projected income statement assumes that all costs are: A.A company that has rapidly growing sales will probably A. build a sales forecast C. Which of the following statements about forecasting external funding requirements via the percentage of sales method is true? A. C. suspense account B. C. Financial Planning & Strategies) 21. Understate profits. The first step in developing a pro forma income statement is to: A. determine the cost of goods sold B. Growth in assets minus the current year's retained earnings C. The plan assumes that sales determine assets that determine the external funding needed. assets. The plan assumes that there is a varying relationship between sales. net income D. C. The plan assumes that sales are determined by assets that determine the external funds needed. dividend payout B. need additional long-term financing C. The plan assumes that the external funds needed impact assets which in turn drive sales. sales 7. and funds needed. C.Under the judgmental approach for developing a pro forma balance sheet. 11. B. accounts receivable D. Variable B. Growth in assets minus growth in liabilities minus net income B. 106 D. There is considerably excessive asset level. no matter what the change in sales. Funds that are obtained automatically from routine business transactions. Constant C. have asset requirements increasing . none of the above 20. A forecasting approach in which the forecasted percentage of sales for each item is held constant. Funds that a firm must raise externally through borrowing or by selling new common or preferred stock. B. The amount of assets required per peso of sales. Which of the following is the major independent variable in constructing pro forma income statements and balance sheets? A.Which of the following best describes a firm's external funding requirement? A. Overstate profits. Additional funds needed are best defined as: A. 8. D. Growth in assets minus growth in current liabilities minus net income D. determine the production schedule D. Most balance sheet accounts are tied directly to sales. D. B. Independent 22. no matter what the change in sales. D. Fixed D. required new financing Percent of sales method 6. retained earnings C. Understate profits when sales are increasing and overstate profits when sales are decreasing. as long as fixed costs are present. 4. The percent of sales method is based on which of the following assumptions? A. Additional funds needed 5. Growth in assets minus growth in current liabilities minus the year's retained earnings 15.Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to A.Financial Management (A. total assets C.

.Which of the following statements is most correct? A. A reduction in its dividend payout ratio. A higher plowback ratio C.The sustainable growth rate is best described by which of the following? A. as these accounts increase. have a financing gap true D. other things equal? A. C. D. A sharp increase in its forecasted sales and the company’s fixed assets are at full capacity. find that all of the above are B.Which of the following is likely to increase the required new financing (RNF) in a given year? A. Higher growth rates will lead to a greater need for investments in fixed assets and working capital. which of the following would increase a firm's external funding requirements in the planning period? A. Since accounts payable and accrued liabilities must eventually be paid. Other factors remaining unchanged. An increase in dividends paid 107 10. which of the following factors is likely to increase its additional financing requirement? A. The company decides to reduce its reliance on accounts payable as a form of financing. If a firm retains all of its earnings. the maximum rate of growth without requiring external financing. Financial Planning & Strategies) B. 13. D. A higher return on equity B. that is. The company reduces its dividend payout ratio. the firm can offset the needed increase in current assets with its idle fixed assets capacity. The company’s profit margin increases. C. The maximum rate of sales growth of a company without raising external funds from the sale of stock.Which of the following will not permit a higher internal growth rate. B. The rate of sales growth that will sustain the assets of the company.Financial Management (A. The rate of earnings growth needed to avoid external financing. 12. D. and common stock.Which of the following is incorrect regarding the effect of growth on the need for external financing? A. D. Growth 19. A higher return on assets Sustainable growth rate 16. then it will not need any additional funds to support sales growth. Additional funds needed are typically raised from some combination of notes payable. C. All of the above 17. One very simple starting point may be a percentage of sales model in which many key variables are assumed to be directly proportional to sales. If sales grow. The sustainable growth rate is the rate at which the firm can grow with the option of flexibly changing its leverage ratio. The maximum rate of sales growth of a company without using external debt. B. required new financing also increases. The internal growth rate is the maximum rate that the firm can grow if it relies entirely on reinvested profits to finance its growth. Sensitivity analysis 9. C. B. A new cost control produces more efficient costs. A decrease in accruals D. B. An increase in assets C. The company is operating well below full capacity.Monument Corporation has developed a forecasting model to determine the additional funds it needs in the coming year. These accounts are nonspontaneous in that they require an explicit financing decision to increase them. long-term bonds. A higher debt-to-asset ratio D. Suppose a firm is operating its fixed assets below 100 percent capacity but is at 100 percent with respect to current assets. B. C. The company increases its reliance on trade credit that sharply raises its accounts payable. Holding all other variables constant. D.

a return on sales of 15%.800 108 Taxes (40%) 1.000. Accounts receivable has been 25% of sales while inventory has been 10% of cost of sales. there were no other current liabilities.000 Sales increase projected for next year 20 percent Net income this year P 250. spontaneous liabilities will increase by P2 million.200.500 C.000) is given below: Cash P 10 Accounts payable P 15 Accounts 25 Notes payable 20 receivable 6 . Based on the RNF formula.440 B. The company’s interest expense is expected to remain at P200.000 D. P 200.000. The company’s dividend payout ratio is 40 percent. how much additional capital must the company raise in order to support the 20 percent increase in sales? A. Since the company is at full capacity.000 C. P3.140 C.520 Net income to common shareholders P2.000 Accrued wages and taxes P 200. The company has P70 million in total assets. and net income equal to P5 million. its profit margin will remain at its current level. a net income of P3 million. P 40.000 5 .000 Accounts payable P 600.000 .400.500 B.000 EBIT P4. how much should be raised in external funds? A.000 Interest 200 Earnings before taxes (EBT) P3.000 B. Almond Corporation recently reported the following income statement for 2006 (in P’000): Sales P7. P1.000 D.000 Except for the accounts noted. P2. the company is forecasting a 20 percent increase in sales. the other 50 percent will be additions to retained earnings. Calculate the total assets of Premiere Company given the following information: Sales this year P3. P 2.600.000.000 B.000 C. What is the forecasted addition to retained earnings for 2007? A.000 Notes payable P 100. and a plowback ratio of 40%. Financial Planning & Strategies) PPROBLEMS: Percent-of-sales method Total assets requirements 1 .000 B.790 Additional financing needed 4 . 2006 balance sheet (in P’000. The company also estimates that if sales increase 20 percent. P1. P240. P 6. P 8.260 D.200. P270.Financial Management (A.000 Dividend payout ratio 40 percent Projected excess funds available next year P 100. P 800. P1. P 9.000 Operating costs 3. P1. Total assets requirements would be A.000. Leverage Company’s December 31. Lamp has minimum cash balance of P10. The company plans to pay out 50 percent of its net income as dividends.280 The company forecasts that its sales will increase by 10 percent in 2007 and its operating costs will increase in proportion to sales. P2. a gross profit margin of 45%. If the company’s sales increase. P115. Assume that the firm’s profit margin remains constant and that the company is operating at full capacity. and the tax rate will remain at 40 percent. P1. A. If a firm uses external financing as a plug item.000. Lamp has projected sales of P100.000. Patio Company recently reported sales of P100 million. P1.000 and fixed assets are projected to be P75.000. its assets must increase in proportion to sales.000 Addition to retained earnings 3 .000 Additional Financing Needed Total assets 2 .000 C.000 D.200. P 600.000. Over the next year.000 D. has a new capital budget of P2 million.

P40. so its assets and spontaneous liabilities will increase proportionately with an increase in sales. P4.125. Financial Planning & Strategies) Accrued expenses 15 Long-term debt 30 Net fixed assets 75 Common stock 70 Total assets P150 Total Liab & P150 equity Sales during the past year were P100. P55.000 B. Assume the company uses the AFN formula and all additional funds needed (AFN) will come from issuing new long-term debt. Balance Sheet (In million pesos) Liabilities and Stockholders’ Equity Accounts payable and accrualsP25 P50 Notes payable – long term 30 Common stock 15 40 Retained earnings 20 P90 Total P90 has an after-tax profit margin of 5 percent and a ratio of 30 percent.000 during 2007. P3. P2.500.000 D. P3. required new financing (RNF).000 109 Assets Current assets Fixed assets Total Spark Company dividend payout If sales grow by (RNF) to finance A. Current assets P 600.333.000 Notes payable 100. Spark Company has plants in 3 major cities.500.000 Long-term debt 300. P112.000.000 Total Assets P1. Currently.850.000 Accrued liabilities 100.000.000 7 Inventories 40 B.000 Total common equity 400. Hello Company has the following balance sheet as of December 31. net income of P100.000 B.000 C. and dividends of P60. will be needed during the next year? A.000 D. P52.000 C. P3.000.000 and they are expected to rise by 50 percent to P150. the company reported sales of P5 million. P3.000 D. P 88.000 Fixed assets 400.5 million in sales and P0.Financial Management (A.000. how much long-term debt will the company have to issue in 2007? A.500. P2.000 In 2006. Indo Industries has P2. the company’s fixed assets are operating at 75 percent of capacity.000 Accounts payable P 100. Assume the company is at full capacity.575 . What level of sales could Indo Industries have obtained if it had been operating at full capacity? A. P 92.000. What amount of nonspontaneous.125. so Leverage Company could have supported P100.650.000 of sales with fixed assets that were only 85 percent of last year’s actual fixed assets.000 Maximum sales 9 .000.000.000 Total Liabilities and Equity P1. Spark Company is already using assets at full capacity. and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary directly with sales.000 .8 million in fixed assets.000 B.000. The company anticipates its sales will increase 20 percent in 2007 and its dividend payout will remain at 60 percent.000. Assume that Leverage’s profit margin will remain constant at 5 percent and that the company will continue to pay out 60 percent of its earnings as dividends. the required new financing the expansion is C. P49.000 C. 2006.000. Given its forecast. during last year fixed assets were being utilized to only 85 percent of capacity.800.000 New Long-term debt 8 . 10 percent next year. P 60. Also.333 D. P5. Sales for last year were P100 million.

Financial Management (A.000 receivable Inventory 20. Pierre Company has the following ratios: A*/S = 1.000 25.000 in current assets. and an annual sales growth objective of 9%? A.8 percent B. it does not want to use any external funds to support such expansion due to the particularly high interest rates in the market now. • Current sales = P100. What is the maximum dividend payout ratio consistent with not requiring external funds for a firm with an ROE of 15%. Wales Company has P8. • Spontaneous liabilities = P10. P155. 3. • Profit margin = 10%. L*/S = 0. or 45 percent.6.000 10.8% D.000 Total P106. 6.8 percent D. profit margin = 0.000 B.000.000 59. 9.000 D. 4. The Ripley Company is trying to determine an acceptable growth rate in sales. In addition.000 15. P150.000.500 D. and dividend payout ratio = 0.200.000 88.000.10. what is the level of long-term financing? A.00 0 0 0 If Luminous’ policy is to finance all fixed assets and half the permanent current assets with long-term financing and rest with short-term financing. what is the maximum growth rate it can sustain without requiring additional funds? • Capital intensity ratio = 1. Wales Company 110 .000.500 C. While the firm wants to expand.000 Accts 66. The table below displays its wide variation in current asset components.000 and no current liabilities.4. Approximately 10% D. Approximately 1% C. A. Assuming that these ratios will remain constant and that all liabilities increase spontaneously with increases in sales. P127. Wales Company’s earnings before interest and taxes are P2.45.6% C.000 10. has total fixed assets of P100. P100.000 47. 3. Luminous Co.000 P100. P225. Approximately 20% Financing Policy Conservative policy 13 .000 Aggressive policy 14 . 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Cash P P P P 20. How much would Wales Company’s earnings after taxes under this financing plan? A.000 invested in fixed assets.000 20. 5.500. P 68.00 P118. Sales last year were P100 million. 7.00 P121.2.1% Maximum dividend payout ratio 12 .000. • Dividend payout ratio = 50%. the firm has P6. Having gathered the following data for the firm. P3. Approximately 12% B. P212.2% B. Income tax rate is 40 percent. what is the maximum growth rate Piere Company can achieve without having to employ nonspontaneous external funds? A. a debtequity ratio of 50%. P 85. Financial Planning & Strategies) Maximum growth rate 10 .6 percent 11 wishes to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing costing 15 percent.000 of which are considered permanent current assets. Short-term financing currently costs 10 percent. 4.000 B.000 C.9 percent C.000 65.625 . x 0.90 x 10 M) – ( .5( Increase in Retained Earnings Answer: C Capital budget Increase in retained earnings (3M x 0.520.25 x 10 M) – (.2) – (3.000 x 0.000 P2.6) = -100.000 x 1.000 Deduct current level of fixed assets 75.000 Answer: D Fixed required by P100M sales (P75M x 0.000 x 0.000 5.000 Additional capital 8.05 x 110 M) 6 .1 . Answer: D The note payable is assumed to be a nonspontaneous liability.000 Deduct: Increase in spontaneous liabilities 2.0833 x 0.000 Total financing needed 43.000 5.000 Required increase in fixed assets 20.000 800.000 P115.200.05 x 0.000 25.05 x 0.200.000 x 0.1) EBIT Interest Earnings before tax Income tax P4.000 1.000 – 180.400. Answer: B Sales forecast (P7M x 1.625.000 Increase in retained earnings (120M x 0.000 Total fixed assets required by P150M sales (150 ÷ 100 x P63.000 A = 1.000 0.520. Let A = Total Assets 0.5 x (P75M – P30)22.000 .000.25 x P100.260.000 1.300.000) P95.000 P1. Answer: C Cash Accounts receivable Inventory Fixed assets Total assets required (0.∆RE (0.000 P4.2A – 160.000 Deduct increase in retained earnings (P150M x 0.2) 14.000 3.000 1.000 = -100.2A – (800.750.000) (0.500 2 .600.4) External funds needed P7.000 Increase in net spontaneous assets 0.500.2A = 240.750.70 x . Answer: C Additional assets (70M 0.000 Answer: C RNF = (SA/S0 x ∆S) – ( SL/S0 x ∆S) .000 2.000.625.000 3 4 . 5 .000.1) Operating costs (P3M x 1. 7 .4) Net income Dividends (P2.125.2 x 0.6) 3.000) 0.400.125.000 P4.4) 3.000 200.600. .700.85) P63.500 75.260.680.000 Additional Financing Needed P40.000.55) P 10.1 x P100.

2X .6.000 x 1. Total assets based on intensity ratio: (100.000 Alternative Solution: RNF = (0.2) liabilities (200.0.1 x 25M) – (0.02 x 0.000g = 5.000 40.1RR = 0.60 127.000 – 1.000 .000 160.000 .145X = 120.055X = 1.4) 112.09 RR = 90% P120.8% .000 SA = Spontaneous (variable) assets SL = Spontaneous (variable) liabilities RE = Retained earnings ∆S = Increase in sales 8 .000 + 5.333.7 x 0.000.10X) = 0 1.000 g 4.000 X = 104.2) 0 = g(120.850.33 3.000g – – 10.055X = 0 1.000 (2. Answer: B 1.500 After tax income: (2.493/100.8% 11 .500 225.500.000 – 3.000.10) Interest costs 1. Answer: Increase Increase Increase Increase Increase D in in in in in total assets (1M x 0.1RR 0.000.09 – 0.1 x 0.000) – 0.987.75M x 0.33 48. Answer: B Long-term financing (11.6(X – 100.000 x (1+g)] 0 = 110.500 Short-term financing (2.762. Answer: B Amount sales per capacity unit Amount of sales at 100% capacity: 23.2(X – 100.6667 x RR) 0 = (0.000. Answer: B Equity ratio: 1 ÷(1 + 0.000g – 5. [g(A* – L*)]– (RR x ROS x S1) *Refer to spontaneous or variable assets and liabilities.67% 0 = 0.2) net spontaneous assets retained earnings long-term debt (RNF) 200.333.000) .05 x 110M)= 2.000) – (0.4(X – 100.000) – 1 = 4.000 12 13 .000) – 0.650.333 10 .000 (6M x 0.000 x (1 + g) 0 = 110.5 x 100.333.650.5M ÷ 75) 100 x 33.09 – (0.000 = 2.000) – [0.803. Answer: B The solution may use the RNF formula.55 x 0.987.493 Growth: (104.1 x 90M) – (0.5) 66.15 x 0.25M x 0.000 9 .000.000g 105.803.000.000 x 0.15 1.

00M 3.Financing Mix: Fixed assets Permanent level of current assets Temporary level of current assets Total Long-term Financing 14 6.000 Permanent current assets represent the lowest level of current assets during the year. Answer: C Fixed assets 100.000 x 0.50M (0.000 Permanent current assets (100.75M 2.25M . .5M) 11.5) 50.5 x 4.000 Total Permanent Financing 150.

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