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Financial Forecasting

1
Planning for future growth is called:
A)
B)
C)
D)

capital budgeting
working capital management
financial forecasting
none of the above

Explanation: This involves looking ahead to the future.


2
Which one of the following is NOT a tool of financial forecasting?
A)
B)
C)
D)

cash budget
capital budget
pro forma balance sheet
pro forma income statement

Explanation: The other three are all tools used by an analyst.


3
The first step in developing a pro forma income statement is to:
A)
B)
C)
D)

build a sales forecast


determine the production schedule
determine cost of goods sold
none of the above

Explanation: A sales forecast begins the process.


4
Pro forma statements are _______ statements.
A)
B)
C)
D)

actual
projected
a previous year's
none of the above

Explanation: Pro forma statements are based on estimates or projections.


5
All of the following compose cost of goods sold except ________________.
A)
B)
C)
D)

raw material
labor
overhead
all of the above are part of cost of goods sold

Explanation: The cost of good sold involves all three of these items.
6
Financial managers use the _____________ to plan for monthly financing
needs.
A)
B)
C)
D)

capital budget
cash budget
pro forma income statement
none of the above

Explanation: The cash budget allows for planning cash needs.


7
The payments that a firm collects from its customers are called
_______________.
A)
B)
C)
D)

cash disbursements
cash outflows
cash receipts
none of the above

Explanation: Cash receipts represent cash coming into the firm.


8
Examples of cash disbursements are all but _________________.
A)
B)

payment for materials purchased


collection of accounts receivable

C)
D)

payment of dividends
payment of taxes

Explanation: The collection of accounts receivable is an example of a cash


receipt, not a cash disbursement.
9
In developing the pro forma balance sheet, we get common stock from
_________________.
A)
B)
C)
D)

the firm's previous balance sheet


the firm's cash budget
the firm's income statement
none of the above

Explanation: Common stock appears on the balance sheet.


10
The percent of sales method of financial forecasting shows us the
relationship between ___________ and financing needs.
A)
B)
C)
D)

changes in the level of liabilities


changes in the level of assets
changes in debt
changes in the level of sales

Explanation: It compares the relationship between balance sheet items and


sales.

Operating and Financial Leverage


1
An example of a semi-variable cost is:
A)
B)
C)

rent
raw material
depreciation

D)

utilities

Explanation: The other three represent fixed or variable costs.


2
_____________ is the point at which firm profit is equal to zero.
A)
B)
C)
D)

breakeven
operating breakeven
financial leverage
combined breakeven

Explanation: This is the point where the firm's revenues equal its expenses.
3
In breakeven analysis, if fixed costs rise, then the breakeven point will
__________.
A)
B)
C)
D)

fall
rise
stay the same
none of the above

Explanation: This implies that a larger quantity will have to be sold in order
to break even.
4
In the breakeven formula, Price - Variable Cost is called
the_____________.
A)
B)
C)
D)

breakeven point
leverage
contribution margin
none of the above

Explanation: This implies that a larger quantity will have to be sold in order
to cover the additional fixed costsand still break even.
5

Which of the following types of firms may operate with high operating
leverage?
A)
B)
C)
D)

a doctor's office
an auto manufacturing facility
a mental health clinic
none of the above would have high operating leverage

Explanation: This implies a high break-even point and high operating


expenses.
6
The ____________________ is the percentage change in operating
income that results from a percentage change in sales.
A)
B)
C)
D)

degree of financial leverage


breakeven point
degree of operating leverage
degree of combined leverage

Explanation: This is called the degree of operating leverage (DOL).


7
If interest expenses for a firm rise, we know that firm has taken on more
______________.
A)
B)
C)
D)

financial leverage
operating leverage
fixed assets
none of the above

Explanation: Financial leverage refers to interest expense on debt.


8
The ________________ is the percentage change in earnings per share
that results from a percentage change in operating income.
A)
B)
C)

degree of combined leverage


degree of financial leverage
breakeven point

D)

degree of operating leverage

Explanation: This is known as the degree of financialleverage (DFL).


9
Combined leverage is the percentage change in relationship between sales
and ____________.
A)
B)
C)
D)

operating income
operating leverage
earnings per share
breakeven point

Explanation: This combines operating leverage and financial leverage.


10
A highly leveraged firm is __________ risky than its peers.
A)
B)
C)
D)

less
more
the same
none of the above

Explanation: Leverage is equivalent to risk, because it implies a higher


level of fixed costs.

Working Capital and the Financing


Decision
1
Working capital management involves the financing and management of
the _______ assets of the firm.
A)
B)
C)
D)

fixed
total
current
none of the above

Explanation: Working capital management deals with the financing and


management of current assets.
2
An asset sold at the end of a specified time period is called a
_____________ asset.
A)
B)
C)
D)

temporary current
self-liquidating
current
permanent current

Explanation: A self-liquidating asset is one that will be sold after a certain


amount of time.
3
Fixed assets are usually financed with _____________ funds.
A)
B)
C)
D)

long-term
short-term
permanent
none of the above

Explanation: Fixed assets are by definition long-term assets.


4
______________ is usually used to finance self-liquidating assets.
A)
B)
C)
D)

Long-term financing
Short-term financing
Permanent financing
none of the above

Explanation: These are short-term or temporary assets.


5
Short-term interest rates, in a normal economy, are generally ________
than long-term rates.

A)
B)
C)
D)

higher
the same
lower
none of the above

Explanation: Long-term interest rates are normally higher than short-term


interest rates to compensate for uncertainty or risk.
6
The expectations hypothesis says that _________ interest rates are a
function of _______ interest rates.
A)
B)
C)
D)

short-term; long-term
long-term; short-term
short-term; short-term
none of the above

Explanation: This theory says that long-term interest rates reflect the
average of short-term expected rates.
7
Insurance companies would tend to invest in __________ securities.
A)
B)
C)
D)

short-term
intermediate term
long-term
not enough information to answer

Explanation: An insurance company would prefer long-term securities


because they are more conservative or safer.
8
The ______________ theory says that investors must be paid a premium
to hold long-term securities.
A)
B)
C)
D)

expectations hypothesis
time value theory
segmentation
liquidity premium

Explanation: This is the liquidity premium.


9
Short-term financing plans with high liquidity have:
A)
B)
C)
D)

high return and high risk


moderate return and moderate risk
low profit and low risk
none of the above

Explanation: This is known as a "middle-of-the-road" approach.


10
Long-term financing plans with low liquidity have:
A)
B)
C)
D)

high return and high risk


moderate return and moderate risk
low return and low risk
none of the above

Explanation: This is also known as a "middle-of-the-road" approach.

Current Asset Management


1
The transaction motive for holding cash is for
A)
B)
C)
D)

a safety cushion
daily operating requirements
compensating balance requirements
none of the above

Explanation: This is money for everyday transactions.


2
Which of the following motives for holding cash is required by the bank
before loaning money?

A)
B)
C)
D)

compensating balance motive


transactions motive
precautionary motive
none of the above

Explanation: This can be considered a form of collateral.


3
The difference between the cash balance on the firm's books and the
balance shown on the bank's books is called:
A)
B)
C)
D)

the compensating balance


float
a safety cushion
none of the above

Explanation: Float implies that it takes time for checks to clear.


4
Electronic funds transfer has __________ the use of float.
A)
B)
C)
D)

reduced
increased
had no effect on
none of the above

Explanation: Electronic funds transfer (EFT) has moved cash more quickly
and reduced float.
5
The most utilized marketable security by most firms is the:
A)
B)
C)
D)

Treasury bond
Agency security
Certificate of Deposit
Treasury bill

Explanation: Treasury bills (T-Bills) are very safe, popular investments.

6
Of the following marketable securities, which are guaranteed by the
Federal government?
A)
B)
C)
D)

agency securities
negotiable certificates of deposit
banker's acceptances
none of the above

Explanation: None of these are backed by the government.


7
The 5 C's of credit include:
A)
B)
C)
D)

conditions
collateral
character
all of the above

Explanation: The other two C's of credit are capacity and capital.
8
The use of safety stock by a firm will:
A)
B)
C)
D)

reduce inventory costs


increase inventory costs
have no effect on inventory costs
none of the above

Explanation: Safety stock is extra inventory a firm keeps in case of


unforseen circumstances.
9
All of these factors are used in credit policy administration except:
A)
B)
C)
D)

credit standards
terms of trade
dollar amount of receivables
collection policy

Explanation: The other three choices are the primary policy variables to
consider.
10
Firms aim to hold ______ cash balances since cash is a non-interest
earning asset.
A)
B)
C)
D)

low
average
high
none of the above

Explanation: A firm does not want to keep too much cash on hand because
it will lose interest (by not keeping the money in a bank).

Sources of Short-Term Financing


1
The largest provider of short-term credit for a business is:
A)
B)
C)
D)

banking organizations
suppliers to the firm
commercial paper
Eurodollars

Explanation: This is also known as trade credit.


2
The number of days until the firm is past due to a supplier is called the:
A)
B)
C)
D)

discount period
term to credit
payment period
none of the above

Explanation: The payment period is the number of days a firm has to pay
its bill.

3
If a firm is given trade credit terms of 2/10, net 30, then the cost of the firm
failing to take the discount is:
A)
B)
C)
D)

2%
30%
36.72%
10%

4
The interest rate given by a bank to its most creditworthy customers is the:
A)
B)
C)
D)

prime rate
LIBOR rate
federal funds rate
discount rate

Explanation: This is the "best" interest rate charged to people with excellent
credit.
5
Which of the following types of bank loans generally have the highest
effective rate of interest?
A)
B)
C)
D)

simple interest loan


discount interest loan
loan with a compensating balance
installment loan

Explanation: Installment loans tend to be the most expensive.


6
If a firm needs to borrow $100,000, at 8% interest, to finance working
capital needs and a 20% compensating is required, then the firm should
borrow __________.
A)
B)
C)

$100,000
$80,000
$125,000

D)

$108,000

Explanation: The formula to calculate this is: amount needed/(1-c), where c


= the compensating balance percentage.
7
If a bank offers a firm a simple interest loan of $1000 for 120 days at a cost
of $60 interest, what is the effective rate of interest on the loan?
A)
B)
C)
D)

18.00%
6.00%
20.00%
none of the above

Explanation: This is calculated by using formula 8-2 in this chapter.


8
If a company raises money to finance short-term needs by selling its
accounts receivable to another party, this is called ___________.
A)
B)
C)
D)

pledging
warehousing
factoring
none of the above

Explanation: Factoring means selling the accounts receivable outright.


9
The most restrictive policy for using inventory as collateral for short-term
borrowing is called:
A)
B)
C)
D)

blanket inventory lien


warehousing inventory
trust receipt
factoring

Explanation: This is a complex method of inventory financing wherein the


lender takes control of the inventory.
10

A type of accounts receivable financing where a firm uses its receivables as


collateral is called:
A)
B)
C)
D)

pledging
securitization
factoring
warehousing