Q&A Hero

Q: Table 1Dorian Industries' projected sales for the first six months of 2004 are given below:Jan. $200,000April $400,000Feb. $240,000May $320,000March $280,000June $320,00025% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale, and the remaining 25% is collected in the second month following the sale. Cost of goods sold is 75% of sales. Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale. Total other cash expenses are $60,000/month. The company's cash balance as of February 28, 2004 will be $40,000. Excess cash will be used to retire short-term borrowing (if any). Dorian has no short-term borrowing as of February 28, 2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $25,000 at the beginning of each month. Round all answers to the nearest $100.Based on the information in Table 1, what is Dorian's projected EBIT for March 2004?A) ($10,000)B) ($30,000)C) $70,000D) None of the above

Q: Table 1Dorian Industries' projected sales for the first six months of 2004 are given below:Jan. $200,000April $400,000Feb. $240,000May $320,000March $280,000June $320,00025% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale, and the remaining 25% is collected in the second month following the sale. Cost of goods sold is 75% of sales. Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale. Total other cash expenses are $60,000/month. The company's cash balance as of February 28, 2004 will be $40,000. Excess cash will be used to retire short-term borrowing (if any). Dorian has no short-term borrowing as of February 28, 2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $25,000 at the beginning of each month. Round all answers to the nearest $100.Based on the information in Table 1, what is Dorian's projected cumulative short-term borrowing as of April 30, 2004?A) $15,000B) $60,000C) $35,150D) None of the above

Q: Table 1Dorian Industries' projected sales for the first six months of 2004 are given below:Jan. $200,000April $400,000Feb. $240,000May $320,000March $280,000June $320,00025% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale, and the remaining 25% is collected in the second month following the sale. Cost of goods sold is 75% of sales. Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale. Total other cash expenses are $60,000/month. The company's cash balance as of February 28, 2004 will be $40,000. Excess cash will be used to retire short-term borrowing (if any). Dorian has no short-term borrowing as of February 28, 2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $25,000 at the beginning of each month. Round all answers to the nearest $100.Based on the information in Table 1, what is Dorian Industries' ending cash balance (before borrowing) in March?A) $10,000B) $25,000C) $20,000D) ($30,000)

Q: Table 1Dorian Industries' projected sales for the first six months of 2004 are given below:Jan. $200,000April $400,000Feb. $240,000May $320,000March $280,000June $320,00025% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale, and the remaining 25% is collected in the second month following the sale. Cost of goods sold is 75% of sales. Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale. Total other cash expenses are $60,000/month. The company's cash balance as of February 28, 2004 will be $40,000. Excess cash will be used to retire short-term borrowing (if any). Dorian has no short-term borrowing as of February 28, 2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $25,000 at the beginning of each month. Round all answers to the nearest $100.Based on the information in Table 1, what is Dorian Industries' total disbursement in May (not including interest on short-term borrowing)?A) $300,000B) $240,000C) $25,900D) ($60,000)

Q: Table 1Dorian Industries' projected sales for the first six months of 2004 are given below:Jan. $200,000April $400,000Feb. $240,000May $320,000March $280,000June $320,00025% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale, and the remaining 25% is collected in the second month following the sale. Cost of goods sold is 75% of sales. Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale. Total other cash expenses are $60,000/month. The company's cash balance as of February 28, 2004 will be $40,000. Excess cash will be used to retire short-term borrowing (if any). Dorian has no short-term borrowing as of February 28, 2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $25,000 at the beginning of each month. Round all answers to the nearest $100.Based on the information in Table 1, what are Dorian Industries' total cash receipts (collections) for April 2004?A) $400,000B) $300,000C) $100,000D) ($60,000)

Q: The function of a budget includes to:A) indicate the amount and time of future financing needs.B) provide a basis for corrective action.C) provide information for performance evaluations.D) all of the above.

Q: A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October? A) $25,000 B) $15,000 C) $35,000 D) None of the above

Q: Which of the following is always a non-cash expense? A) Income taxes B) Salaries C) Depreciation D) None of the above

Q: Purchases of plant and equipment can be determined from the: A) current cash budget. B) previous period's balance sheet. C) pro forma income statement. D) use of ratio analysis.

Q: All of the following are found in the cash budget EXCEPT: A) a net change in cash for the period. B) inventory. C) cash disbursements. D) new financing needed.

Q: Which of the following will increase cumulative borrowing in the cash budget? A) Slower collections from customers B) Slower payments to suppliers C) Higher interest rates D) Faster collection of receivables

Q: Which of the following is NOT a basic function of a budget? A) Budgets indicate the need for future short-term financing. B) Budgets provide the basis for corrective action when actual figures differ from the budgeted figures. C) Budgets compare historical costs of the firm with its current cost performance. D) Budgets allow for performance evaluation.

Q: Lindsey Insurance Co. has current sales of $10 million and predicts next year's sales will grow to $14 million. Current assets are $3 million and fixed assets are $4 million. The firm's net profit margin is 7% after taxes. Presently, Lindsey has $900,000 in accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million in retained earnings) in common equity. Next year, Lindsey projects that current assets will rise in direct proportion to the forecasted sales, and that fixed assets will rise by $500,000. Lindsey also plans to pay dividends of $400,000 to common shareholders.a. What are Lindsey's total financing needs for the upcoming year?b. Given the above information, what are Lindsey's discretionary financing needs?

Q: Amalgamated Enterprises is planning to purchase some new equipment. With this new equipment, the company expects sales to increase from $8,000,000 to $10,000,000. A portion of the financing for the purchase of the equipment will come from a $1,000,000 new common stock issue. The company knows that current assets, fixed assets, accounts payable, and accrued expenses increase in direct proportion with sales. The company's net profit margin on sales is 8%, and the company plans to pay 40% of its after-tax earnings in dividends. A copy of the company's current balance sheet is given below:Amalgamated Enterprises Balance SheetCurrent assets$3,000,000Fixed assets12,000,000Total assets$15,000,000Accounts payable$4,000,000Accrued expenses1,000,000Long-term debt3,000,000Common stock2,000,000Retained earnings5,000,000Total liabilities and net worth$15,000,000Prepare a pro forma balance sheet for Amalgamated for next year using the percent-of-sales method and the information provided above.

Q: Frog Hollow Bakery is a new firm specializing in all-natural-ingredient pastry products. In attempting to determine what the financial position of the firm should be, the financial manager obtained the following average ratios for the baking industry for 2004: Common equity to total assets = 60% Total asset turnover = 3 times Long-term debt to total capitalization = 25% Current ratio = 1.2 Quick ratio = .75 Average collection period (360-day year) = 10 days Complete the accompanying pro forma balance sheet for Frog Hollow Bakery assuming 2005 sales (all credit) are $450,000. Frog Hollow Bakery Pro Forma Balance Sheet 31-Dec-05 Cash $ Current debt $ Accounts receivable Long-term debt Inventory Total current assets Common equity Fixed assets Total liabilities and equity $ Total assets

Q: The balance sheet of the Jackson Company is presented below: Jackson Company Balance Sheet 31-Mar-04 (Millions of Dollars) Current assets $12 Accounts payable $6 Fixed assets 18 Long-term debt 12 Total $30 Common equity 12 Total $30 For the year ending March 31, 2004, Jackson had sales of $35 million. The common stockholders received all net earnings of the firm in the form of cash dividends, leaving no funds from earnings available to the firm for expansion (assume that depreciation expense is just equal to the cost of replacing worn-out assets). Construct a pro forma balance sheet for March 31, 2005 for an expected level of sales of $45 million. Assume current assets and accounts payable vary as a percent of sales, and fixed assets remain at the present level. Use notes payable as a source of discretionary financing.

Q: What is meant by discretionary financing?

Q: What is meant by spontaneous financing?

Q: Because accounts payable and accrued expenses increase with sales, they represent sources of spontaneous financing.

Q: If the firm's current fixed assets are sufficient to support the projected level of new sales, then these assets would be projected to remain unchanged for the forecast period.

Q: When fixed expenses increase relative to sales, it indicates that there is not enough productive capacity to absorb an increase in sales.

Q: Discretionary sources of financing are those sources that vary automatically with a firm's level of sales.

Q: It is common practice to develop optimistic and pessimistic scenarios when projecting financial statements.

Q: The most commonly used method for making financial forecasts is the percent-of-sales method.

Q: When forecasting statements, assets always increase proportionately to sales regardless of capacity.

Q: Pro forma statements are important since they formally report the performance of the firm during a previous reporting period.

Q: Pro forma statements provide single point estimates of each budgeted item.

Q: Holding all other variables constant, as the dividend payout ratio decreases, the sustainable growth rate increases.

Q: One of the virtues of the percent-of-sales method is the precision of the estimate it provides for future financing needs.

Q: Long-term financial plans must include capital expenditures.

Q: The percent-of-sales method is a commonly used method for estimating a firm's financing needs.

Q: The percentages used in the percent-of-sales method comes from pro forma financial statements.

Q: The initiation of a major advertising campaign would be an example of an event that would affect past trends in sales when projecting statements.

Q: The projected change in retained earnings equals projected net income less any dividends to be paid.

Q: Use the following information and the percent-of-sales method to answer the following question(s). Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales. (For consistency with the Answer selections provided, round your forecast percentages to two decimals.) Banner, Inc. Balance Sheet 31-Dec-04 Assets Current assets $890,000 Net fixed assets 1,000,000 Total $1,890,000 Liabilities and Owners' Equity Accounts payable $160,000 Accrued expenses 100,000 Notes payable 700,000 Long-term debt 300,000 Total liabilities 1,260,000 Common stock (plus paid-in capital) 360,000 Retained earnings 270,000 Common equity 630,000 Total 1,890,000 Banner's projected discretionary financing needed for 2005 is: A) $420,000. B) $440,000. C) $360,000. D) $370,000.

Q: Use the following information and the percent-of-sales method to answer the following question(s). Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales. (For consistency with the Answer selections provided, round your forecast percentages to two decimals.) Banner, Inc. Balance Sheet 31-Dec-04 Assets Current assets $890,000 Net fixed assets 1,000,000 Total $1,890,000 Liabilities and Owners' Equity Accounts payable $160,000 Accrued expenses 100,000 Notes payable 700,000 Long-term debt 300,000 Total liabilities 1,260,000 Common stock (plus paid-in capital) 360,000 Retained earnings 270,000 Common equity 630,000 Total 1,890,000 Banner's projected retained earnings for 2005 are: A) $260,000. B) $280,000. C) $340,000. D) $350,000.

Q: Use the following information and the percent-of-sales method to answer the following question(s). Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales. (For consistency with the Answer selections provided, round your forecast percentages to two decimals.) Banner, Inc. Balance Sheet 31-Dec-04 Assets Current assets $890,000 Net fixed assets 1,000,000 Total $1,890,000 Liabilities and Owners' Equity Accounts payable $160,000 Accrued expenses 100,000 Notes payable 700,000 Long-term debt 300,000 Total liabilities 1,260,000 Common stock (plus paid-in capital) 360,000 Retained earnings 270,000 Common equity 630,000 Total 1,890,000 Banner's projected long-term debt for 2005 is: A) $700,000. B) $880,000. C) $380,000. D) $300,000.

Q: Use the following information and the percent-of-sales method to answer the following question(s). Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales. (For consistency with the Answer selections provided, round your forecast percentages to two decimals.) Banner, Inc. Balance Sheet 31-Dec-04 Assets Current assets $890,000 Net fixed assets 1,000,000 Total $1,890,000 Liabilities and Owners' Equity Accounts payable $160,000 Accrued expenses 100,000 Notes payable 700,000 Long-term debt 300,000 Total liabilities 1,260,000 Common stock (plus paid-in capital) 360,000 Retained earnings 270,000 Common equity 630,000 Total 1,890,000 Banner's projected accrued expenses for 2005 are: A) $120,000. B) $160,000. C) $100,000. D) $200,000.

Q: Use the following information and the percent-of-sales method to answer the following question(s). Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales. (For consistency with the Answer selections provided, round your forecast percentages to two decimals.) Banner, Inc. Balance Sheet 31-Dec-04 Assets Current assets $890,000 Net fixed assets 1,000,000 Total $1,890,000 Liabilities and Owners' Equity Accounts payable $160,000 Accrued expenses 100,000 Notes payable 700,000 Long-term debt 300,000 Total liabilities 1,260,000 Common stock (plus paid-in capital) 360,000 Retained earnings 270,000 Common equity 630,000 Total 1,890,000 Banner's projected accounts payable balance for 2005 is: A) $160,000. B) $120,000. C) $200,000. D) $300,000.

Q: Use the following information and the percent-of-sales method to answer the following question(s). Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales. (For consistency with the Answer selections provided, round your forecast percentages to two decimals.) Banner, Inc. Balance Sheet 31-Dec-04 Assets Current assets $890,000 Net fixed assets 1,000,000 Total $1,890,000 Liabilities and Owners' Equity Accounts payable $160,000 Accrued expenses 100,000 Notes payable 700,000 Long-term debt 300,000 Total liabilities 1,260,000 Common stock (plus paid-in capital) 360,000 Retained earnings 270,000 Common equity 630,000 Total 1,890,000 Banner's projected fixed assets for 2005 are: A) $1,120,000. B) $1,260,000. C) $1,000,000. D) $2,380,000.

Q: Use the following information and the percent-of-sales method to answer the following question(s). Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales. (For consistency with the Answer selections provided, round your forecast percentages to two decimals.) Banner, Inc. Balance Sheet 31-Dec-04 Assets Current assets $890,000 Net fixed assets 1,000,000 Total $1,890,000 Liabilities and Owners' Equity Accounts payable $160,000 Accrued expenses 100,000 Notes payable 700,000 Long-term debt 300,000 Total liabilities 1,260,000 Common stock (plus paid-in capital) 360,000 Retained earnings 270,000 Common equity 630,000 Total 1,890,000 Banner's projected current assets for 2005 are: A) $1,000,000. B) $1,120,000. C) $1,500,000. D) $1,260,000.

Q: Which of the following will reduce the firm's financing requirements? A) The firm operates at full capacity B) The firm has excess capacity C) The firm expects rapid growth in sales D) The firm increases its dividend payout ratio

Q: Swings in discretionary financing needed can be caused by: A) firm profitability. B) economic activity. C) industry influence. D) all of the above.

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: Which of the following will decrease discretionary funds needed? A) An increase in projected accounts receivable B) An increase in projected accounts payable C) An increase in projected dividends D) Both A and C

Q: Considering each action independently and holding other things constant, which of the following actions would increase a firm's discretionary financing needed (the need for additional capital)? A) A decrease in the firm's accounts receivable average collection period B) An increase in the firm's profit margin C) A decrease in the firm's inventory turnover D) A decrease in the expected growth rate in sales E) A decrease in the firm's tax rate

Q: Which of the following is a source of external capital? A) Retained earnings B) Inventory C) Long-term debt D) Operating income (earnings before interest and taxes) E) None of the above

Q: Holding other things constant, a firm's "discretionary financing needed" (the additional funds required in order to finance the firm) would be reduced if the firm experienced an increase in which of the following? A) The dividend pay-out ratio B) The profit margin C) The accounts receivable average collection period D) The expected growth rate in sales E) The income tax rate

Q: Which of the following accounts would normally increase with an increase in sales and approximately in proportion to the sales increase? A) Common stock B) Inventory C) Notes payable D) Dividends E) Accounts receivable

Q: Assume all else remains the same. Which of the following statements is true? A) The lower a firm's profit margin, the more discretionary financing a firm will require. B) The higher a firm's profit margin, the more discretionary financing a firm will require. C) The lower a firm's profit margin, the more cash a firm will have to reinvest. D) A relationship between a firm's profit margin and its requirement for external financing does not exist.

Q: Assume all else remains the same. Which of the following statements is true? A) The lower the dividend payout, the less a firm will have to reinvest. B) The higher the dividend payout, the more discretionary financing a firm will require. C) The lower the dividend payout, the more discretionary financing a firm will require. D) The higher the dividend payout, the higher the retention percentage.

Q: An increase in projected ________ will increase discretionary funds needed. A) cash dividends B) sales C) retained earnings D) both A and B

Q: A discretionary form of financing would be: A) notes payable. B) accounts payable. C) accrued expenses. D) none of the above.

Q: Which of the following is the correct method of determining discretionary financing needed (DFN)? A) Projected change in assets, divided by projected change in liabilities, plus projected change in owner's equity B) Projected change in assets, times projected change in owner's equity, minus projected change in liabilities C) Projected change in owner's equity, minus projected change in liabilities, plus projected change in assets D) Projected change in assets, minus projected change in liabilities, minus projected change in owner's equity

Q: Compare the Stable Dividend Payout to the Residual Dividend Policy.

Q: Compare management's motives for preferring either stock repurchases or cash dividends.

Q: Share repurchases convey information to investors that the shares are underpriced.

Q: The residual dividend theory indicates that a firm would never pay dividends unless the firm's profits were larger than its equity financing needs.

Q: The stable dividend policy is the most common.

Q: European firms tend to pay out more dividends than U. S. firms.

Q: Unexpected dividend changes would cause investors to reassess their perceptions about a firm's stock.

Q: Company managers strive to gradually increase dividend series over the long-term future.

Q: The residual dividend theory suggests that dividends should be paid to stockholders first, and then, what is left can be reinvested by the firm.

Q: A stable dividend policy generally leads to a lower required rate of return on the part of the investor when compared to similar stocks with erratic fluctuations in dividends.

Q: We typically expect to find rapidly growing firms to have high payout ratios.

Q: Groups of investors who prefer one distribution method over another are known as: A) pressure groups. B) return chasers. C) dividend clienteles. D) retirees.

Q: Which of the following considerations would be expected to influence a firm's decision regarding the payment of dividends? A) Earnings predictability B) Legal restrictions C) Liquidity position D) All of the above

Q: The dividend policy that states smoothing of the dividend stream in order to minimize the effect of company reversals is called the: A) increasing-stream hypothesis of dividend policy. B) stable dividend policy. C) clientele effect policy. D) residual payout policy.

Q: Stock splits: A) increase the number of shares outstanding. B) decrease the common stock account by the amount of the split. C) reduce retained earnings. D) increase the total wealth of stockholders. E) none of the above.

Q: Franklin Electric is presently generating earnings available to common shareholders of $7.25 per share. The firm's income tax rate is 40%. Franklin is paying a dividend to the preferred shareholders of $2.10 per share. The firm's dividend payout ratio on common stock is 20%. What is the amount per share that Franklin will pay in dividends to common shareholders? A) $0.58 B) $1.45 C) $3.12 D) $0.42 E) $2.20

Q: According to the residual theory of dividends: A) dividends are to be paid out only after investment financing needs have been met. B) earnings remaining after payment of preferred stock dividends should be paid to common stockholders. C) dividend payments are a constant percentage of EPS. D) a dividend is the residual above the payout ratio.

Q: What is the fundamental purpose of a stock split? A) A split shows the company's preference for retaining funds. B) A split immediately brings the stock price to a lower trading range. C) A split immediately increases the investor's wealth. D) A split increases the threat of a hostile takeover.

Q: Which of the following is more true of cash dividends than of repurchase offers? A) The amount of cash to be returned to shareholders is flexible on a year to year basis. B) External funds would be raised before reducing stock repurchase offers but not before cutting cash distributions. C) Cash distribution decisions would take priority over investment decisions. D) The stock price would be severely penalized if the cash distribution is reduced.

Q: Which of the following statements is true? A) The stable dividend payout ratio keeps the dollar amount of the dividend stable. B) Dividends usually do not increase unless management is convinced that the higher dividend can be maintained in the future. C) The dividend policy which allows for an extra dividend at year-end in prosperous years includes a fairly large regular dividend payment per share every year. D) All of the above are true.

Q: In practice, firms tend to increase their dividend: A) when the stock seems to be underpriced in the market. B) Reducing cash to force executives to focus on efficient investment decisions. C) only when they believe they can sustain the increased payout indefinitely. D) when company is holding more cash than it would like.

Q: Which of the following is least important to repurchase decisions of large American corporations? A) The stock seems to be underpriced in the market. B) Reducing cash to force executives to focus on efficient investment decisions. C) Lack of good investment opportunities for cash retained in the firm. D) The company is holding more cash than it would like.

Q: Which of the following is most likely to have a negative impact on stock price? A) Omitting a stock repurchase offer B) Failure to increase the dividend at the same rate as previous years C) Cutting the dividend per share in dollar terms D) Reducing the dividend payout ratio

Q: Which of the following is the most important factor motivating dividend policy for large American corporations? A) Changes in EPS B) Maintain constant dividend payout ratio C) Avoiding flotation costs of selling new stock D) Avoid reducing dividends per share

Q: Which of the following motivates corporations to enter into stock repurchase programs? A) Favorable impact on EPS B) Expected favorable impact on stock price C) To modify the firm's capital structure D) All of the above

Q: Which of the following statements about the residual dividend theory is FALSE? A) The firm will maintain its optimum debt ratio in financing future investments. B) Dividend policy by itself has no direct influence on the market price of the firm's common stock. C) The firm will issue new common stock to finance investment opportunities in order to ensure that some dividend will be paid. D) The firm's investment opportunities, capital structure, and profitability all influence the firm's dividend policy.