Chapter 6: Financial Planning: Short Term and Long Term

CHAPTER 6
FINANCIAL PLANNING: SHORT TERM AND LONG TERM
True-False Questions
T. 1. The weighted average of a set of possible outcomes or scenarios is nown
as e!pected values.
T. ". The rate at which a firm can grow sales based on the retention of business
profits is nown as sustainable sales growth rate.
F. #. The constant ratio forecasting method maes pro$ections based on the
assumption that certain costs and some balance sheet items are best e!pressed
as a percentage of sales.
F. %. The percent of sales forecasting method pro$ects selected cost and balance
items at the same growth rate as sales.
T. &. The cost of obtaining additional funds' such as additional interest e!penses
from borrowing funds' ma( be e!plicit and impact )F*.
F. 6. The added costs associated with obtaining e+uit( capital are based on
investor e!pected rates of return and are e!plicit costs which affect )F*.
F. ,. Short-term financial planning t(picall( involves preparing monthl(
financial statements and focuses on identif(ing and planning for net income
demands on the business.
T. .. /ven in a (oung' successful venture' restricted access to ban credit and
with little to no access to short-term lending marets can hinder operations
until the ne!t round of financing.
F. 0. ) firm with a positive growth rate in sales will re+uire some additional
funds' assuming the e!isting ratios will not be changed.
T. 11. )n increase in accounts receivable will re+uire additional financing unless
the increase is offset b( an e+ual decrease in another asset account.
T. 11. The actions of screening business ideas' preparing a business plan' and
obtaining seed financing occurs during a venture2s development stage.
T. 1". Short-term cash planning tools include preparation of a: sales schedule' a
purchases schedule' a wages and commissions schedule' and a cash budget.
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Chapter 6: Financial Planning: Short Term and Long Term
F. 1#. ) cash budget shows a venture2s pro$ected revenues and e!penses over a
forecast period.
T. 1%. Forecasting for firms with operating histories is generall( much easier than
forecasting for earl(-stage ventures.
T. 1&. )n e!pected value is a weighted average of a set of scenarios or possible
outcomes.
F. 16. ) 3cash budget4 is a firm2s pro$ected sales and e!penditures over a
forecast period.
F. 1,. Sales forecasting accurac( is usuall( highest during a venture2s startup
stage in its life c(cle.
F. 1.. 3Public or seasoned financing4 t(picall( occurs during the survival stage
of a venture2s life c(cle.
T. 10. Sales forecasting accurac( is usuall( lowest during a venture2s
development stage in its life c(cle.
T. "1. ) 3sustainable sales growth rate4 is the rate at which a firm can grow sales
based on the retention of profits in the business.
F. "1. 35nternall( generated funds4 is the cash produced from operating a firm
over a specified time period.
T. "". 3Financial capital needed4 6FC*7 is the amount of funds needed to
ac+uire assets necessar( to support a firm2s sales growth.
T. "#. The 3constant-ratio forecasting method4 is a variant of the 3percent-of-
sales forecasting method.4
T. "%. 3)dditional funds needed4 6)F*7 is the gap remaining between the
financial capital needed and that funded b( spontaneousl( generated funds and
retained earnings.
F. "&. 3Spontaneousl( generated funds4 are increases in accounts receivable and
accounts pa(able that accompan( sales increases.
F. "6. 3First-round financing4 usuall( occurs during a venture2s rapid-growth life
c(cle stage.
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Chapter 6: Financial Planning: Short Term and Long Term
Multile-C!oi"e Questions
e. 1. 8hich of the following is not a step in forecasting sales for a seasoned
firm9
a. forecast future growth rates based on possible scenarios and the
probabilities of those scenarios.
b. attempt to corroborate the pro$ected sales growth rates anal(:ing
both industr( growth rates and the firm2s own past maret share.
c. refine the sales forecast b( using the sales force as a direct contact
with both e!isting and potential customers.
d. tae into consideration the liel( impact of ma$or operating changes
within the firm on the sales forecast.
e. consider the effects of changes in the firm2s debt;e+uit( blend on
the sales forecasts.
e. ". ) firm is said to be an earl( stage venture when it is in which of the
following e!cept9
a. rapid growth stage
b. startup stage
c. development stage
d. survival stage
e. maturit( stage
a. #. <uring which round of financing is a venture t(picall( most accurate in
forecasting sales9
a. seasoned financing
b. me::anine financing
c. first round financing
d. startup financing
e. seed financing
d. %. <uring which life c(cle stage is a venture t(picall( most accurate in
forecasting sales9
a. rapid growth stage
b. startup stage
c. development stage
d. maturit( stage
e. survival stage
c. &. 5nternall( generated funds which are available for distribution to owners of
for reinvestment bac into the business to support future growth can be
characteri:ed b( which of the following9
a. operating income
b. operating cash flow
c. net income
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Chapter 6: Financial Planning: Short Term and Long Term
d. net cash flow
e. pre-ta! income
d 6. The financial funds needed to ac+uire assets necessar( to support a firm2s
sales growth is called:
a. spontaneousl( generated funds
b. additional funds needed
c. addition in retained earnings
d. financial capital needed
a. ,. The increase in accounts pa(ables and accruals that occur with a sales
increase is called:
a. spontaneousl( generated funds
b. additional funds needed
c. addition in retained earnings
d. financial capital needed
b. .. The financial funds still needed to finance asset growth after using
spontaneousl( generated funds and an( increase in retained earnings is called:
a. spontaneousl( generated funds
b. additional funds needed
c. addition in retained earnings
d. financial capital needed
d. 0. 8hich one of the following would increase a firm2s need for additional
funds9
a. an increasing profit margin
b. a decreasing e!pected sales growth rate
c. an increase in accruals
d. an increasing dividend pa(out rate
e. a decrease in assets
b. 11. 8hich of the following is not part of the financial forecasting process used
to pro$ect financial statements9
a. forecast sales
b. forecast ta! rates
c. pro$ect the income statement
d. pro$ect the balance sheet
e pro$ect the statement of cash flows

b. 11. ) firm pro$ects net income to be =&11'111' intends to pa( out =1"&'111 in
dividends' and had =" million of e+uit( at the beginning of the (ear. The
firm2s sustainable growth rate is9
a. &>
b. 1&>
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Chapter 6: Financial Planning: Short Term and Long Term
c. 6."&>
d. %.60>
e. none of the above
b. 1". ) firm has net income of =#"1'111 on sales of =#'"11'111. 5t2s assets total
="'111'111' the e+uit( at the beginning of the (ear was =1'611'111 and
dividends paid were =.1'111. 8hat is the sustainable growth rate9
a. &>
b. 1&>
c. 6."&>
d. %.60>
e. none of the above
c. 1#. ?our firm recorded sales for the most recent (ear of =11 million generated
from an asset base of =, million' producing a =&11'111 net income. Sales are
pro$ected to grow at "1>' causing spontaneous liabilities to increase b(
="11'111. 5n the most recent (ear' ="11'111 was paid out as dividends' and
the current pa(out ratio will continue in the upcoming (ears. 8hat is (our
firm2s additional funds needed9
a. ="11'111
b. =611'111
c. =.%1'111
d. =061'111
e. =1'%11'111
b. 1%. ) sales growth rate based on the retention of profits is referred to as the:
a. real sales growth rate
b. sustainable sales growth rate
c. spontaneous sales growth rate
d. nominal sales growth rate
e. weighted average sales growth rate
a. 1&. ) 3new4 venture usuall( begins its sales forecast b( first:
a. forecasting industr( sales and e!pressing the venture2s sales as a
percent of industr( sales
b. using a 3bottom-up4 maret-driven approach
c. e!trapolating past sales
d. woring with e!isting and potential customers
b. 16. )n 3e!pected value4 is:
a. a simple average of a set of scenarios or possible outcomes
b. a weighted average of a set of scenarios or possible outcomes
c. the highest scenario value or outcome
d. the lowest scenario value or outcome
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Chapter 6: Financial Planning: Short Term and Long Term
d. 1,. 8hich one of the following life c(cle stages would generall( be associated
with the second lowest sales forecasting accurac(9
a. maturit(
b. rapid-growth
c. survival
d. start-up
e. development
a. 1.. Seed financing is generall( associated with which one of the following life
c(cle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
e. maturit( stage
e. 10. Public or seasoned financing is generall( associated with which one of the
following life c(cle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
e. maturit( stage
c. "1. First-round financing is generall( associated with which one of the
following life c(cle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
e. maturit( stage
d. "1. 8hich one of the following ratios is not part of the 3standard4 return on
e+uit( 6@A/7 model9
a. net profit margin
b. asset turnover
c. e+uit( multiplier
d. retention rate
c. "". 5f beginning of period common e+uit( is ="11'111 and end of period
common e+uit( is =#11'111' the sustainable growth rate is:
a. ##>
b. %1>
c. &1>
d. 6,>
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Chapter 6: Financial Planning: Short Term and Long Term
e. ,&>
d. "#. Bse the following information to estimate a venture2s sustainable growth
rate: *et income C ="11'111D Total assets C =1'111'111D e+uit( multiple based
on beginning common e+uit( C ".1 timesD and @etention rate C "&>.
a. &1>
b. "&>
c. "1>
d. 11>
e. &>
b. "%. 5f a venture has a return on assets 6@A)7 C 11>' an e+uit( multiplier
based on beginning e+uit( C #.& times' and a retention rate C &1>' the
sustainable growth rate would be:
a. 11>
b. 1,.&>
c. #&>
d. %1>
e. "1.&>
b. "&. 5f a venture has a return on assets 6@A)7 C 11>' an e+uit( multiplier
based on beginning e+uit( C %.1 times' and a dividend pa(out ratio of 61>' the
sustainable growth rate would be:
a. 11>
b. 16>
c. "1>
d. "%>
e. %1>
e. "6. 5f a venture has a return on assets 6@A)7 C 1">' an e+uit( multiplier
based on beginning e+uit( C #.1 times' and a sustainable growth rate of 1.>'
the retention rate would be:
a. 11>
b. "1>
c. #1>
d. %1>
e. &1>
d. ",. ) venture2s common e+uit( was =&1'111 at the end of last (ear. 5f the
venture2s common e+uit( at the end of this (ear was =61'111' what was its
sustainable sales growth rate9
a. &>
b. 11>
c. 1&>
d. "1>
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Chapter 6: Financial Planning: Short Term and Long Term
e. "&>
e. ".. ) venture2s common e+uit( account increased b( =111'111 the past (ear
and ended the (ear at =&11'111. 8hat was its sustainable sales growth rate9
a. &>
b. 11>
c. 1&>
d. "1>
e. "&>
a. "0. <etermine a venture2s sustainable growth rate based on the following
information: sales C =1'111'111D net income C =111'111D common e+uit( at
the beginning of the (ear C =&11'111D and the retention rate C &1>
a. 11>
b. 1&>
c. "1>
d. "&>
e. #1>
e. #1. <etermine a venture2s sustainable growth rate based on the following
information: sales C =1'111'111D net income C =1&1'111D common e+uit( at
the end of last (ear C =&"1'111D and the dividend pa(out percentage C "1>
a. 11>
b. 16>
c. "1>
d. "%>
e. #1>
a. #1. <etermine a firm2s 3financial polic(4 multiplier based on the following
information: sustainable growth rate C "1>D net profit margin C 11>D and
asset turnover C " times.
a. 1.11
b. 1."&
c. 1.&1
d. 1.,&
e. ".11
e. #". <etermine a firm2s 3return on assets4 percentage based on the following
information: sustainable growth rate C "1>D total assets =&11'111D beginning
of (ear common e+uit( ="11'111D and dividend pa(out percentage C 61>.
a. 11.1>
b. 1".&>
c. 1&.1>
d. 1,.&>
e. "1.1>
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