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Finance
Q:
Which of the following is a spontaneous source of financing?
A) accrued expenses
B) notes payable
C) common stock
D) paid-in-capital
Q:
A discretionary form of financing would be
A) notes payable.
B) accounts payable.
C) accrued expenses.
D) A and B
Q:
Spontaneous sources of financing include
A) accounts payable and accrued expenses.
B) notes payable and mortgages payable.
C) long-term debt and capital leases.
D) common stock and paid-in capital.
Q:
The "percentage" used in the percent of sales calculation can come
A) from the most recent financial statement item as a percent of current sales.
B) from an average computed over several years.
C) from an analyst's judgment.
D) from any of the above or a combination of the above.
Q:
A sales forecast for the coming year would reflect
A) any past trend which is expected to continue.
B) the influence of any events that might materially affect that trend.
C) both A and B.
D) neither A nor B.
Q:
The first step involved in predicting financing needs is
A) forecasting the firm's sales revenues and expenses over the planning period.
B) estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
C) determining the firm's financing needs throughout the planning period.
D) estimating the cost of debt.
Q:
Gerentology Associates, a highly profitable company, is considering two growth strategies, one that will achieve sales growth of 20% in one year, and the other that will achieve 20% growth in sales, but over a 4-year time frame. Assuming Gerentology Associates uses the percent of sales method, which of the following statements is true?
A) Discretionary financing needed will be much greater for the 4-year growth strategy.
B) Discretionary financing needed could be much less for the 4-year growth strategy due to retained earnings.
C) The asset balances at the end of 4 years for strategy two will be much greater than the asset balances required at the end of year one for strategy one.
D) Discretionary financing needed could be much greater for the slow growth strategy because interest charges will accumulate on the company's debt.
Q:
Using the percentage of sales method, forecasted retained earnings balance is equal to
A) prior year retained earnings plus projected net income less projected dividends.
B) the ratio of retained earnings to sales for the current year multiplied by projected sales for next year.
C) the retained earnings balance for the current year as no changes are made to this financing account when using the percent of sales method.
D) the ratio of retained earnings to sales for the current year multiplied by projected sales for next year, minus dividends paid.
Q:
Fixed assets are often estimated incorrectly by the percent of sales method because
A) fixed assets remain constant and the percent of sales method assumes all assets increase proportionally with sales.
B) fixed asset are very expensive.
C) fixed assets are typically purchased in "lumps" and therefore do not increase proportionally with sales.
D) fixed assets are part of the capital budgeting process.
Q:
Which of the following will most likely result in an increase in discretionary funding needed?
A) The company's profit margin increases.
B) The company's dividend payout ratio increases.
C) The company's assets are only operating at 50% of capacity.
D) The company pays its accounts payable in 50 days, up from 45 days.
Q:
Using the percentage of sales method of forecasting,
A) all asset and liability accounts increase or decrease proportionally with sales.
B) only asset accounts increase or decrease proportionally with sales.
C) accounts payable and accrued expenses are the only liabilities that increase or decrease proportionally with sales.
D) all balance sheet accounts increase or decrease proportionally with sales.
Q:
When forecasting fixed asset requirements, the projected fixed asset balance will
A) not increase proportionally with sales if the existing level of fixed assets is sufficient to support current sales.
B) not increase proportionally if excess capacity exists.
C) remain the same since the balance is fixed.
D) always increase proportionally with sales.
Q:
Potential sources of financing to support an increase in sales include all of the following EXCEPT
A) increase in the dividend payout ratio.
B) increase in spontaneous liabilities.
C) increase in accounts payable.
D) issuance of bonds and/or common stock.
Q:
DAS, Inc. is preparing its financial forecast for next year and its discretionary financing needed is negative. This means that
A) sales growth must be negative.
B) the predicted change in total assets must be negative.
C) the predicted change in spontaneous liabilities and retained earnings must be greater than the predicted change in total assets.
D) the dividend payout ratio must be greater than the predicted growth rate in sales.
Q:
All of the following will increase the discretionary financing needed EXCEPT
A) decrease the net profit margin.
B) decrease the dividend payout ratio.
C) decrease the sales growth rate.
D) decrease the spontaneous financing.
Q:
The CFO of Twine Enterprises expects sales to increase from $8,000,000 in 2010 to $12,000,000 in 2011. Current assets in 2010 are equal to $5,000,000. Using the percent of sales method, projected current assets for 2011 are equal to
A) $5,500,000.
B) $7,083,333.
C) $9,000,000.
D) $7,500,000.
Q:
Using the percent of sales method and assuming that no excess capacity exists, a 20% increase in sales will result in
A) a 20% increase in total assets.
B) a 20% increase in total liabilities.
C) a 20% increase in retained earnings.
D) a 20% increase in the company's profit margin.
Q:
Discretionary financing accounts include all of the following EXCEPT
A) long-term debt.
B) notes payable.
C) accrued liabilities.
D) common stock.
Q:
Ribbon Industries reported sales of $3 million and net income of $400,000 for 2010. The retained earnings balance at the end of 2012 is $7 million. Ribbon Industries has a dividend payout ratio of 30%. If sales are expected to increase by 25% next year, what will be the projected balance in retained earnings using the percent of sales method?
A) $7,280,000
B) $6,720,000
C) $7,350,000
D) $8,750,000
Q:
A company calculates its discretionary financing needed and determines this amount of capital cannot be raised at a reasonable cost. Which of the following would reduce the amount of discretionary financing needed?
A) reduce the company's net profit margin
B) reduce the company's sales growth rate
C) increase the company's dividend payout ratio
D) increase the proportion of the company's sales that are made on credit
Q:
The percent of sales method can be used to forecast
A) expenses.
B) assets.
C) liabilities.
D) all of the above
Q:
Pro forma statements are important since they formally report the performance of the firm during the previous reporting period.
Q:
The percent of sales forecasting method works well because it accounts for economies of scale in assets such as inventory.
Q:
If external financing needed cannot be obtained due to poor market conditions, a firm could reduce the amount needed by increasing its retention ratio.
Q:
Using the percent of sales method, projected common stock on the 2010 pro forma balance sheet is equal to (Common Stock 2009/Sales 2009) times Projected Sales 2010.
Q:
For a growing firm, external financing needed will most likely be greater than discretionary financing needed due to increases in accounts payable and accruals.
Q:
Discretionary financing needed can be positive or zero, but not negative.
Q:
Other things equal, if a firm increases its dividend payout ratio, its discretionary financing needed will also increase.
Q:
Other things equal, higher net profit margins mean higher discretionary financing needed.
Q:
Discretionary financing needed (DFN) is equal to projected total assets minus projected total liabilities minus projected owners' equity.
Q:
When preparing pro forma financial statement, the income statement must be prepared first because the projected retained earnings balance on the balance sheet is based on the expected net income.
Q:
Spontaneous financing is financing obtained at the last minute due to poor financial planning.
Q:
Purchasing supplies on credit and paying for them 45 days later is an example of discretionary financing.
Q:
It is often the case that the planning process has its greatest value when the resulting forecasts have the most error, because the planning process offers its greatest value when the future is the most uncertain.
Q:
Forecasts of revenues and their related expenses are the basis on which firms forecast their future financing needs.
Q:
A set of estimates which corresponds to the worst and best case outcomes is often desired in preparing a financial forecast.
Q:
Discretionary sources of financing are those sources that vary automatically with a firm's level of sales.
Q:
Accrued expenses represent a spontaneous form of financing.
Q:
Pro forma financial statements depict the end result of the planning period's operations.
Q:
One of the virtues of the percent-of-sales method is the precision of the estimate of future financing needs.
Q:
Accounts payable and accrued expenses are known as discretionary sources of financing.
Q:
Traditional financial forecasting takes the sales forecast as given and forecasts the corresponding expenses, assets, and liabilities of the firm.
Q:
When fixed costs are part of a firm's cost structure, the percent of sales method will understate net income and overstate discretionary financing needed, if sales are increasing.
Q:
Discretionary financing needed will be zero when the company's sales growth rate is zero.
Q:
Discretionary financing needed is equal to projected total assets minus projected total liabilities.
Q:
The forecasted retained earnings balance is equal to (current retained earnings/current sales) times projected sales for next year.
Q:
In order to reduce discretionary financing needed, a profitable company could decrease its dividend payout ratio.
Q:
Notes payable and bonds payable are spontaneous liabilities.
Q:
In the percent of sales method, a company's asset requirements are based on the company's projected sales level.
Q:
The first step in a corporation's financial forecasting process is the determination of the firm's financing needs.
Q:
Discretionary financing needed must be obtained through additional borrowing because additional equity measured by the increase in retained earnings has already been deducted.
Q:
If the sales growth rate is greater than zero, then the discretionary financing needed will also be greater than zero.
Q:
Issuing new short-term bonds to finance an expansion is an example of spontaneous financing.
Q:
For a typical firm expecting higher sales, external financing needed will be greater than discretionary financing needed.
Q:
Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.
Q:
A corporation that increases it net profit margin will need less discretionary financing, other things being equal.
Q:
The percent of sales method assumes that all assets and all liabilities increase proportionally with sales, but retained earnings does not.
Q:
The percent of sales method does not provide a reasonable prediction of asset levels for instances when there are economies of scale in the use of the asset being forecast and when asset purchases are lumpy.
Q:
Financial forecasting is the process of attempting to estimate a firm's future financing requirements.
Q:
The key ingredient in a firm's financial planning is an accurate sales forecast.
Q:
Share repurchases are not part of the stock valuation process because by definition the cash flow from a share repurchase ends the investment as the stock is no longer owned by the shareholder.
Q:
Expected dividends and share repurchases are the cash flow that underlies stock valuation.
Q:
Corporations distribute cash back to their owners (stockholders) either as cash dividends or by repurchasing shares of stock in the open market.
Q:
A firm's dividend policy includes two basic components: the dividend payout ratio and dividend stability.
Q:
Dividends per share divided by earnings per share equal the dividend payout ratio.
Q:
Within the context of a stock repurchase, what is meant by a tender offer?
Q:
Identify three reasons why a firm might buy back its own common stock shares.
Q:
Which of the following will result from a stock repurchase?
A) Earnings per share will rise.
B) Number of shares will increase.
C) Corporate cash is conserved.
D) Ownership is diluted.
Q:
All of the following are methods available to a corporation that desires to repurchase stock EXCEPT
A) offer to employees who own an interest in the firm.
B) open market.
C) tender offer to all existing stockholders.
D) offer to one or more major stockholders on a negotiated basis.
Q:
A stock repurchase may be viewed as
A) a dividend decision when the firm has excess cash.
B) a financing decision when the firm wants to alter its capital structure.
C) an operating leverage decision.
D) both A and B.
Q:
Which of the following strategies may be used to alter a firm's capital structure toward a higher percentage of debt compared to equity?
A) stock dividend
B) stock split
C) maintain a low dividend payout ratio
D) stock repurchase
Q:
Stock repurchases may be used for all of the following EXCEPT
A) a means for providing an internal investment opportunity.
B) to improve earnings per share.
C) to decrease the corporation's debt ratio.
D) to eliminate a minority ownership group of stockholders.
Q:
Which of the following statements concerning stock repurchases is MOST correct?
A) Increasingly companies are using stock repurchases to distribute cash to their shareholders, but dividends remain the primary means to distribute cash.
B) Companies currently spend more money on stock buybacks than on dividend payments.
C) Repurchasing stock is strictly a financing decision made by the corporation.
D) A tender offer is the only way to complete a stock repurchase due to SEC rules.
Q:
All of the following are potential benefits of stock repurchases EXCEPT
A) a means for providing an internal investment opportunity.
B) an approach for maintaining the existing capital structure while still making a distribution to shareholders.
C) a favorable impact on earnings per share.
D) the elimination of a minority ownership group of stockholders.
Q:
One potential reason for a share repurchase is
A) to increase the power of a minority group of shareholders.
B) maximize the dilution in earnings associated with a merger.
C) a reduction in the firm's cost associated with servicing small stockholders.
D) to signal the market that the firm's stock price is too high.
Q:
SEC regulations require that corporate stock repurchases must be done in the open market so that all shareholders have an equal opportunity to sell their shares.
Q:
A stock repurchase plan can be viewed as both a financing decision and an investment decision.
Q:
A stock repurchase plan that involves issuing long-term debt to fund the purchase of the company's stock may be used as a way to alter a corporation's capital structure.
Q:
Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and increasing value per share due to repurchase programs is tax deferred.
Q:
Stock repurchases do not alter a company's capital structure since all of the purchased shares are retired and no longer outstanding.