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


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

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

P1. a gross profit margin of 45%.000.000 D.000.000.000 EBIT P4. The company plans to pay out 50 percent of its net income as dividends.000 C. P 8. its assets must increase in proportion to sales.000 Operating costs 3. P 6. Leverage Company’s December 31. there were no other current liabilities. P270.500 C.000.000 Accounts payable P 600. P115.000 Additional Financing Needed Total assets 2 . P1.000 Accrued wages and taxes P 200.000 5 . The company’s interest expense is expected to remain at P200.000 Dividend payout ratio 40 percent Projected excess funds available next year P 100.000 . What is the forecasted addition to retained earnings for 2007? A. If a firm uses external financing as a plug item. Almond Corporation recently reported the following income statement for 2006 (in P’000): Sales P7.000 C. P3.000 Interest 200 Earnings before taxes (EBT) P3. The company has P70 million in total assets.000 Except for the accounts noted.000 D. has a new capital budget of P2 million. and net income equal to P5 million. P2. Lamp has minimum cash balance of P10. Patio Company recently reported sales of P100 million.600.000 B.280 The company forecasts that its sales will increase by 10 percent in 2007 and its operating costs will increase in proportion to sales.000 D. The company also estimates that if sales increase 20 percent. a net income of P3 million.000.200. Based on the RNF formula. P1.500 B.000 and fixed assets are projected to be P75. P 200.260 D. P2. and a plowback ratio of 40%. Total assets requirements would be A.000) is given below: Cash P 10 Accounts payable P 15 Accounts 25 Notes payable 20 receivable 6 .000 Sales increase projected for next year 20 percent Net income this year P 250. spontaneous liabilities will increase by P2 million. the company is forecasting a 20 percent increase in sales.520 Net income to common shareholders P2. how much should be raised in external funds? A. A. P1.Financial Management (A.440 B. how much additional capital must the company raise in order to support the 20 percent increase in sales? A. P 600. 2006 balance sheet (in P’000.000 B.000 Notes payable P 100.000 D. P 2. P1. a return on sales of 15%. P 40. Over the next year. Financial Planning & Strategies) PPROBLEMS: Percent-of-sales method Total assets requirements 1 . P 800. P1. Calculate the total assets of Premiere Company given the following information: Sales this year P3. P240.140 C.000.800 108 Taxes (40%) 1.000 C. Accounts receivable has been 25% of sales while inventory has been 10% of cost of sales. Assume that the firm’s profit margin remains constant and that the company is operating at full capacity. Lamp has projected sales of P100. and the tax rate will remain at 40 percent. P 9.200.400.790 Additional financing needed 4 . If the company’s sales increase.000 Addition to retained earnings 3 .200.000. Since the company is at full capacity.000. The company’s dividend payout ratio is 40 percent.000 B. its profit margin will remain at its current level. the other 50 percent will be additions to retained earnings.

000 C. Sales for last year were P100 million.575 .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 P100.000 7 Inventories 40 B. P 92. The company anticipates its sales will increase 20 percent in 2007 and its dividend payout will remain at 60 percent.125. P4. and dividends of P60.333 D. P3.000 B. net income of P100.000 D. Hello Company has the following balance sheet as of December 31.000 .333.000 Accounts payable P 100.000 B.500. 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).800. Assume the company is at full capacity.000 Maximum sales 9 . Indo Industries has P2.000 Total Assets P1.000.000 Fixed assets 400. so its assets and spontaneous liabilities will increase proportionately with an increase in sales. P52. 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. will be needed during the next year? A. What amount of nonspontaneous.850. P2.000. 2006. P3.000 Long-term debt 300.000 Accrued liabilities 100. Current assets P 600. P3. P112.000. Currently.Financial Management (A.000 during 2007. All assets (including fixed assets) and current liabilities will vary directly with sales.8 million in fixed assets. P 60.650.000 D.000. Spark Company has plants in 3 major cities. how much long-term debt will the company have to issue in 2007? A. 10 percent next year.000 C. the required new financing the expansion is C. required new financing (RNF).500. Assume the company uses the AFN formula and all additional funds needed (AFN) will come from issuing new long-term debt. so Leverage Company could have supported P100.000 B. What level of sales could Indo Industries have obtained if it had been operating at full capacity? A. P5.000. Also.000 Notes payable 100. P49.500. the company’s fixed assets are operating at 75 percent of capacity. P40.000.000. P 88.000 and they are expected to rise by 50 percent to P150. 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. P55. P3.000.000 Total Liabilities and Equity P1.000.5 million in sales and P0.000 109 Assets Current assets Fixed assets Total Spark Company dividend payout If sales grow by (RNF) to finance A. during last year fixed assets were being utilized to only 85 percent of capacity.000 New Long-term debt 8 . Spark Company is already using assets at full capacity.000.000 C.000 In 2006. P2.000 D. Given its forecast.000 of sales with fixed assets that were only 85 percent of last year’s actual fixed assets.000 Total common equity 400. the company reported sales of P5 million.

The Ripley Company is trying to determine an acceptable growth rate in sales. or 45 percent. Short-term financing currently costs 10 percent. 9.8 percent B.2.8% D.500 D.000 C.00 P121.00 P118. P212. 4.4. 5. Pierre Company has the following ratios: A*/S = 1. • Dividend payout ratio = 50%. a debtequity ratio of 50%. P150. Wales Company 110 .500. Approximately 20% Financing Policy Conservative policy 13 . Wales Company has P8. Income tax rate is 40 percent. P100. What is the maximum dividend payout ratio consistent with not requiring external funds for a firm with an ROE of 15%. profit margin = 0. • Current sales = P100.000 65.000.000 B.10.000 20.200. P3.000 Total P106. L*/S = 0. P 68. Approximately 12% B.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. • Profit margin = 10%. The table below displays its wide variation in current asset components. the firm has P6. In addition.000.9 percent C. 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Cash P P P P 20. 4.000. While the firm wants to expand. How much would Wales Company’s earnings after taxes under this financing plan? A. 7.000 D. what is the maximum growth rate Piere Company can achieve without having to employ nonspontaneous external funds? A. Assuming that these ratios will remain constant and that all liabilities increase spontaneously with increases in sales.6.45.000 15. and dividend payout ratio = 0.Financial Management (A.000 Accts 66. Approximately 1% C.1% Maximum dividend payout ratio 12 . and an annual sales growth objective of 9%? A.000. Wales Company’s earnings before interest and taxes are P2.000 59.2% B.625 . Financial Planning & Strategies) Maximum growth rate 10 .000 invested in fixed assets.000 10.000 88. • Spontaneous liabilities = P10. 3.000 25.000 10. Having gathered the following data for the firm. Sales last year were P100 million. A. 3.000 Aggressive policy 14 .000 of which are considered permanent current assets. 6.000 47.6% C.000 and no current liabilities. P127.00 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.000.000 in current assets. P225. what is the level of long-term financing? A. P 85. what is the maximum growth rate it can sustain without requiring additional funds? • Capital intensity ratio = 1.000 receivable Inventory 20. Luminous Co. Approximately 10% D.500 C.000 P100. P155. has total fixed assets of P100.000 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.8 percent D.

000 5.000.000 1. 7 .000 x 0.2 x 0.000.000 – 180.000 Required increase in fixed assets 20.4) 3.5( Increase in Retained Earnings Answer: C Capital budget Increase in retained earnings (3M x 0.000 = -100.500 2 .000 x 0.000 0.000. Answer: C Cash Accounts receivable Inventory Fixed assets Total assets required (0.260.200. 5 .000 25.125.625.000 x 0.300.400.6) 3.750.1 .000 3 4 .400.000) P95.4) External funds needed P7.000 1.000.000 Additional capital 8.000 Total financing needed 43.000 Additional Financing Needed P40. Let A = Total Assets 0.4) Net income Dividends (P2.1) Operating costs (P3M x 1.90 x 10 M) – ( .000 P115.000 P1.000 Total fixed assets required by P150M sales (150 ÷ 100 x P63.000 200.600.000 Increase in net spontaneous assets 0.000 Increase in retained earnings (120M x 0.25 x 10 M) – (.05 x 0.000 x 0.125.1) EBIT Interest Earnings before tax Income tax P4.2) 14. Answer: B Sales forecast (P7M x 1.200.520.5 x (P75M – P30)22.000 2.000.000 x 1.0833 x 0.200.000 Deduct current level of fixed assets 75.000 Answer: D Fixed required by P100M sales (P75M x 0.000 1.600.625.000 P4.260.2A – (800. .∆RE (0.520.000 Answer: C RNF = (SA/S0 x ∆S) – ( SL/S0 x ∆S) .700.680.000 . Answer: D The note payable is assumed to be a nonspontaneous liability.500 75.55) P 10.750.70 x .000 P4.2) – (3.000) (0.500.000.6) = -100.000 A = 1.000 Deduct: Increase in spontaneous liabilities 2.000 800.85) P63.000 P2.000) 0.05 x 0.000 Deduct increase in retained earnings (P150M x 0.2A = 240.200.2A – 160.000 5. Answer: C Additional assets (70M 0.1 x P100.000 3.25 x P100.05 x 110 M) 6 .

000) – (0.1 x 25M) – (0.000. Answer: B Long-term financing (11.493 Growth: (104.000 X = 104.4(X – 100.09 – 0.803.000.000 160.10X) = 0 1.4) 112. Answer: B Amount sales per capacity unit Amount of sales at 100% capacity: 23.120.000g 105.000g – 5. Answer: Increase Increase Increase Increase Increase D in in in in in total assets (1M x 0.000 40.850.67% 0 = 0.6(X – 100.6667 x RR) 0 = (0.55 x 0.000. Answer: B Equity ratio: 1 ÷(1 + 0.05 x 110M)= 2.987.2) liabilities (200.000 SA = Spontaneous (variable) assets SL = Spontaneous (variable) liabilities RE = Retained earnings ∆S = Increase in sales 8 .09 RR = 90% P120.15 1.2(X – 100.000 .000 Alternative Solution: RNF = (0.650.803.0.500 After tax income: (2.000g – 5.055X = 0 1.25M x 0.2) net spontaneous assets retained earnings long-term debt (RNF) 200.500 225.1RR 0.500.5) 66.000 – 1.000 + 5.5 x 100.333 10 .6.000 9 . [g(A* – L*)]– (RR x ROS x S1) *Refer to spontaneous or variable assets and liabilities.000 x (1+g)] 0 = 110.000g = 5.000) – x (1 + g) 0 = 110.7 x 0.000 12 13 .000) – [0. Total assets based on intensity ratio: (100.33 48.33 3.145X = 120.02 x 0.493/100.333.5M ÷ 75) 100 x 33.60 127.000) – 0.2) 0 = g(120.762.500 Short-term financing (2.1RR = 0.75M x 0.15 x 0. Answer: B 1.1 x 0.000 – 3.000 .055X = 1.8% .333.000 x 0.2X .1 x 90M) – (0.10) Interest costs 1.987.000 (6M x 0.09 – (0.650.000.000) . Answer: B The solution may use the RNF formula.000 = 2.000 g 4.200.000 (2.8% 11 .000) – 1 = 4.333.000 x 1.000 – 10.

5 x 4. Answer: C Fixed assets 100. .000 Permanent current assets (100.5M) 11.75M 2.000 Total Permanent Financing 150.50M (0.25M .Financing Mix: Fixed assets Permanent level of current assets Temporary level of current assets Total Long-term Financing 14 6.000 x 0.000 Permanent current assets represent the lowest level of current assets during the year.5) 50.00M 3.

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