Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
(14-4) MM F Q Answer: a MEDIUM
. Modigliani and Miller's first article led to the conclusion that capital structure is "irrelevant" because it has no
assumed that no taxes existed. MM then revised their original article to include corporate taxes, and this model
(almost) 100% debt.
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. Business risk.
b. Total risk.
c. Financial risk.
d. Market risk.
e. The firm's beta.
a. Demand variability.
b. Sales price variability.
c. The extent to which operating costs are fixed.
d. The extent to which interest rates on the firm's debt fluctuate.
e. Input price variability.
(14-3) Capital structure and WACC C Q Answer: d EASY
. Which of the following statements is CORRECT?
a. Since debt financing raises the firm's financial risk, increasing the target debt ratio will always increase the W
b. Since debt financing is cheaper than equity financing, raising a company’s debt ratio will always reduce its W
c. Increasing a company’s debt ratio will typically reduce the marginal costs of both debt and equity financing.
d. Increasing a company’s debt ratio will typically increase the marginal costs of both debt and equity financing
e. Since a firm's beta coefficient is not affected by its use of financial leverage, leverage does not affect the cost
a. The capital structure that maximizes expected EPS also maximizes the price per share of common stock.
b. The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.
c. The capital structure that minimizes the required return on equity also maximizes the stock price.
d. The capital structure that minimizes the WACC also maximizes the price per share of common stock.
e. The capital structure that gives the firm the best bond rating also maximizes the stock price.
a. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s ea
b. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s sto
c. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s co
d. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s co
e. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s co
a. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected
b. The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
c. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the
d. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
e. The optimal capital structure simultaneously maximizes the stock price and minimizes the WACC.
a. A firm’s business risk is determined solely by the financial characteristics of its industry.
b. The factors that affect a firm’s business risk include industry characteristics and economic conditions, both o
c. One of the benefits to a firm of being at or near its target capital structure is that this generally minimizes the
d. A firm’s financial risk can be minimized by diversification.
e. The amount of debt in its capital structure can under no circumstances affect a company’s EBIT and business
a. Since the proposed plan increases the firm’s financial risk, the stock price might fall even if EPS increases.
b. If the plan reduces the WACC, the stock price is likely to decline.
c. Since the plan is expected to increase EPS, this implies that net income is also expected to increase.
d. If the plan does increase the EPS, the stock price will automatically increase at the same rate.
e. Under the plan there will be more bonds outstanding, and that will increase their liquidity and thus lower the
a. Increasing its use of financial leverage is one way to increase a firm’s basic earning power (BEP).
b. If a firm lowered its fixed costs but increased its variable costs by just enough to hold total costs at the presen
c. The debt ratio that maximizes expected EPS generally exceeds the debt ratio that maximizes share price.
d. If a company were to issue debt and use the money to repurchase common stock, this would reduce its basic
company’s operating income.)
e. If a change in the bankruptcy code made bankruptcy less costly to corporations, this would tend to reduce co
a. The two companies have the same times interest earned (TIE) ratio.
b. Firm L has a lower ROA than Firm U.
c. Firm L has a lower ROE than Firm U.
d. Firm L has the higher times interest earned (TIE) ratio.
e. Firm L has a higher EBIT than Firm U.
(14-2) Fin. leverage and ratios C Q Answer: c MEDIUM
. Companies HD and LD have the same total assets, operating income (EBIT), tax rate, and business risk. Com
companies' basic earning power (BEP) ratios exceed their cost of debt (rd). Which of the following statements
a. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use r
b. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
c. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely lead to
d. An increase in the company’s degree of operating leverage would tend to encourage the firm to use more deb
e. An increase in the corporate tax rate would in theory encourage companies to use more debt in their capital s
a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnin
b. The capital structure that minimizes a firm’s weighted average cost of capital is also the capital structure that
c. The capital structure that minimizes the firm’s weighted average cost of capital is also the capital structure th
d. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WA
e. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted theory wo
a. The capital structure that maximizes the stock price is also the capital structure that minimizes the cost of equ
b. The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per s
c. The capital structure that maximizes the stock price is also the capital structure that maximizes the firm’s tim
d. If a company increases its debt ratio, this will typically increase the marginal costs of both debt and equity, b
e. If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, th
a. In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixe
b. There is no reason to think that changes in the personal tax rate would affect firms’ capital structure decision
c. A firm with a relatively high business risk is more likely to increase its use of financial leverage than a firm w
d. If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increa
e. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to the point where it is at i
equity.
a. If Congress lowered corporate tax rates while other things were held constant, and if the Modigliani-Miller ta
cause corporations to decrease their use of debt.
b. A change in the personal tax rate should not affect firms’ capital structure decisions.
c. “Business risk” is differentiated from “financial risk” by the fact that financial risk reflects only the use of de
sales variability, cost variability, and operating leverage.
d. The optimal capital structure is the one that simultaneously (1) maximizes the price of the firm’s stock, (2) m
e. If changes in the bankruptcy code made bankruptcy less costly to corporations, this would likely reduce the a
a. When a company increases its debt ratio, the costs of equity and debt both increase. Therefore, the WACC m
b. The capital structure that maximizes the stock price is generally the capital structure that also maximizes earn
c. All else equal, an increase in the corporate tax rate would tend to encourage companies to increase their debt
d. Since debt financing raises the firm’s financial risk, increasing a company’s debt ratio will always increase it
e. Since the cost of debt is generally fixed, increasing the debt ratio tends to stabilize net income.
a. Generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary amo
b. Electric utilities generally have very high common equity ratios because their revenues are more volatile than
c. Airline companies tend to have very volatile earnings, and as a result they generally have high target debt-to-
d. Wide variations in capital structures exist both between industries and among individual firms within given i
also managerial attitudes.
e. Since most stocks sell at or very close to their book values, book value capital structures are typically adequa
Problems
Some of these problems are conceptually difficult, and they are designated as HARD. Others are not conceptu
into account when making up timed tests.
a. 391,667
b. 411,250
c. 431,813
d. 453,403
e. 476,073
a. 28,880
b. 30,400
c. 32,000
d. 33,600
e. 35,280
a. $72,900
b. $81,000
c. $90,000
d. $100,000
e. $110,000
a. $164,025
b. $182,250
c. $202,500
d. $225,000
e. $247,500
Machine A Machine B
Price per pair (P) $20.00 $20.00
Fixed costs (F) $25,000 $100,000
Variable cost/unit (V) $7.00 $4.00
a. 3,154
b. 3,505
c. 3,894
d. 4,327
e. 4,760
Machine A Machine B
Price per mouse (P) $25.00 $25.00
Fixed costs (F) $100,000 $400,000
Variable cost/unit (V) $15.25 $9.00
Exp. unit sales (Q) 75,000 75,000
a. $123,019
b. $136,688
c. $151,875
d. $168,750
e. $185,625
Machine A Machine B
Price per phone (P) $250.00 $250.00
Fixed costs (F) $1,000,000 $2,000,000
Variable cost/unit (V) $200.00 $150.00
Expected unit sales (Q) 25,000 25,000
Required equity investment $2,500,000 $3,000,000
a. 6.00%
b. 6.67%
c. 7.00%
d. 7.35%
e. 7.72%
a. 5.85%
b. 6.14%
c. 6.45%
d. 6.77%
e. 7.11%
a. $1.00
b. $1.11
c. $1.23
d. $1.37
e. $1.50
a. 12.51%
b. 13.14%
c. 13.80%
d. 14.49%
e. 15.21%
a. 12,600
b. 14,000
c. 15,400
d. 16,940
e. 18,634
a. 4,513
b. 4,750
c. 5,000
d. 5,250
e. 5,513
a. 0.71
b. 0.75
c. 0.79
d. 0.83
e. 0.87
a. 2.74%
b. 3.01%
c. 3.32%
d. 3.65%
e. 4.01%
a. $2,982
b. $3,314
c. $3,682
d. $4,091
e. $4,545
a. $0.49
b. $0.54
c. $0.60
d. $0.66
e. $0.73
a. 5.41%
b. 5.69%
c. 5.99%
d. 6.29%
e. 6.61%
(14-3) ROE & capital structure C Q Answer: c MEDIUM/HARD
. Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Fir
identical--they have the same assets, sales, operating costs, and EBIT. Thus, they differ only in their use of fina
is A's ROE than that of NA, i.e., what is ROEA - ROENA?
a. 8.60%
b. 9.06%
c. 9.53%
d. 10.01%
e. 10.51%
a. 6.73%
b. 7.09%
c. 7.46%
d. 7.83%
e. 8.22%
a. 5.44%
b. 5.73%
c. 6.03%
d. 6.33%
e. 6.65%
(14-2) EPS & financing plans C Q Answer: e HARD
. Your girlfriend plans to start a new company to make a new type of cat litter. Her father will finance the ope
issue now is how to finance the company, with equity only or with a mix of debt and equity. The price per unit
fixed and variable operating costs, along with other information, are shown below. How much higher or lower
equity, i.e., what is EPSL - EPSU?
a. $0.54
b. $0.60
c. $0.67
d. $0.75
e. $0.83
a. $2.55
b. $2.84
c. $3.15
d. $3.50
e. $3.85
a. 1.66%
b. 1.84%
c. 2.02%
d. 2.23%
e. 2.45%
a. 4.05%
b. 4.50%
c. 4.95%
d. 5.45%
e. 5.99%
a. $28.27
b. $29.76
c. $31.25
d. $32.81
e. $34.45
a. 5.68%
b. 5.94%
c. 6.22%
d. 6.52%
e. 6.83%
Check: Is calculated Max. capital budget × % Equity = NI? $550,000 = Net income
EBIT $2,000,000
- Interest expense = Interest rate × Debt 500,000
Taxable income $1,500,000
- Taxes = Tax rate × Income 600,000
Net income (NI) $ 900,000
- Equity needed for capital budget = % Equity(Capital budget) 510,000
Dividends = NI - Equity needed $ 390,000
Old shares surrendered per 1 new share = Target price/Old price = 50.00
No. of new shares per 1 old share = Current price/Target price = 7.00
Post-split stock price = (P0/[New shares per old shares)×(1 + % Value increase)] = $31.50
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
(16-9) Cost of trade credit F S Answer: a EASY
. The calculated cost of trade credit can be reduced by paying late.
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
(16-10) Revolving credit F S Answer: a EASY
. If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain fun
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
(16-3) Short-term financing F S Answer: b MEDIUM
. Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions.
interest of the lender.
a. True
b. False
(16-3) Short-term financing C S Answer: a MEDIUM
. A firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to
would want to separate the construction loan from its current liabilities associated with working capital when ca
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
(16-6) Lockbox C S Answer: b MEDIUM
. On average, a firm collects checks totaling $250,000 per day. It takes the firm approximately 4 days from the
firm. Assume that (1) a lockbox system could be employed which would reduce the cash conversion procedure
generated at 6% after taxes. The lockbox system would be a good buy if it costs $25,000 annually.
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because sho
b. short-term interest rates have traditionally been more stable than long-term interest rates.
c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that bo
d. the yield curve is normally downward sloping.
e. short-term debt has a higher cost than equity capital.
a. Credit period.
b. Collection policy.
c. Credit standards.
d. Cash discounts.
e. Payments deferral period.
Peak Off-Peak
Cash $ 50 $ 30
Marketable securities 0 20
Accounts receivable 40 20
Inventories 100 50
Net fixed assets 500 500
Total assets $690 $620
a. Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in
increased.
b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of shor
inherent risks associated with using short-term financing.
c. If a company follows a policy of "matching maturities," this means that it matches its use of common stock w
d. Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in
decreased.
e. If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt
a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20
b. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50.
c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30.
d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw mater
e. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
a. Payments lags.
b. Payment for plant construction.
c. Cumulative cash.
d. Repurchases of common stock.
e. Writing off bad debts.
a. Payments lags.
b. Depreciation.
c. Cumulative cash.
d. Repurchases of common stock.
e. Payment for plant construction.
a. Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax pa
b. Cash budgets do not include financial items such as interest and dividend payments.
c. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
d. Changes that affect the DSO do not affect the cash budget.
e. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start produ
a. Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets a
b. The cash budget and the capital budget are developed separately, and although they are both important to the
c. Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.
d. The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated
term changes in the firm's operations.
e. The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash.
values; hence, actual results might vary from the budgeted amounts.
a. The firm must make a known future payment, such as paying for a new plant that is under construction.
b. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experie
c. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experie
d. The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
e. The firm just won a product liability suit one of its customers had brought against it.
a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually.
level, since the 10% cash sales can be used to finance the 10% growth rate.
b. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts
collection period (its DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales rat
e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
a. Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department.
b. If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occu
c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then the firm probably has some past due acco
d. If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its
months/365) would probably be lower in January than in July.
e. If a firm changed the credit terms offered to its customers from 2/10, net 30 to 2/10, net 60, then its sales sho
should lead to a decrease in the DSO.
a. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
b. Accruals are "free" in the sense that no explicit interest is paid on these funds.
c. A conservative approach to working capital management will result in most if not all permanent assets being
d. The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term d
on short-term debt and possible difficulties with rolling over short-term debt.
e. Bank loans generally carry a higher interest rate than commercial paper.
a. Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rath
increase the firm's risk.
b. Conservative firms generally use no short-term debt and thus have zero current liabilities.
c. A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term deb
d. If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10, net 30, and if it
accounts payable on its balance sheet.
e. If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not hav
pays off its entire balance.
a. A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its vo
b. Credit policy has an impact on working capital because it influences both sales and the time before receivabl
c. The cash budget is useful to help estimate future financing needs, especially the need for short-term working
d. If a firm wants to generate more cash flow from operations in the next month or two, it could change its cred
e. Managing working capital is important because it influences financing decisions and the firm's profitability.
a. Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), hence depre
b. If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th o
misleading. The problem can be corrected by using a daily cash budget.
c. Sound working capital policy is designed to maximize the time between cash expenditures on materials and t
d. If a firm wants to generate more cash flow from operations in the next month or two, it could change its cred
e. If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then
12 months/365) would probably be lower in October than in August.
a. Accruals are an expensive but commonly used way to finance working capital.
b. A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital
c. If a company receives trade credit under terms of 2/10, net 30, this implies that the company has 10 days of f
d. One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an
e. If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its
Problems
a. $260,642
b. $274,360
c. $288,800
d. $304,000
e. $320,000
a. 31 days
b. 34 days
c. 38 days
d. 42 days
e. 46 days
(16-4) Cash conversion cycle C S Answer: b EASY
. Romano Inc. has the following data. What is the firm's cash conversion cycle?
a. 33 days
b. 37 days
c. 41 days
d. 45 days
e. 49 days
a. 31 days
b. 34 days
c. 37 days
d. 41 days
e. 45 days
(16-4) Cash conversion cycle C S Answer: d EASY
. Inmoo Company’s average age of accounts receivable is 45 days, the average age of accounts payable is 40 d
year, what is the length of its cash conversion cycle?
a. 63 days
b. 67 days
c. 70 days
d. 74 days
e. 78 days
a. $24,057
b. $26,730
c. $29,700
d. $33,000
e. $36,300
(16-8) Accounts receivable balance C S Answer: a EASY
. Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. W
a. $335,616
b. $352,397
c. $370,017
d. $388,518
e. $407,944
a. 4.25%
b. 4.73%
c. 5.25%
d. 5.78%
e. 6.35%
Sales $110,000
Accounts receivable $16,000
Days sales outstanding (DSO) 53.09
Benchmarks' days sales outstanding (DSO) 20.00
a. $8,078
b. $8,975
c. $9,973
d. $10,970
e. $12,067
a. 11.7 days
b. 13.0 days
c. 14.4 days
d. 15.2 days
e. 16.7 days
a. $7,316
b. $8,129
c. $9,032
d. $10,036
e. $11,151
a. $764
b. $849
c. $943
d. $1,048
e. $1,164
a. 25 days
b. 28 days
c. 31 days
d. 35 days
e. 38 days
a. 28 days
b. 32 days
c. 35 days
d. 39 days
e. 43 days
Original Revised
Annual sales: unchanged $110,000 $110,000
Cost of goods sold: unchanged $80,000 $80,000
Average inventory: lowered by $4,000 $20,000 $16,000
Average receivables: lowered by $2,000 $16,000 $14,000
Average payables: increased by $2,000 $10,000 $12,000
Days in year 365 365
a. 34.0
b. 37.4
c. 41.2
d. 45.3
e. 49.8
a. -26 days
b. -22 days
c. -18 days
d. -14 days
e. -11 days
a. -26.6 days
b. -29.5 days
c. -32.8 days
d. -36.4 days
e. -40.5 days
a. $1,092
b. $1,150
c. $1,210
d. $1,271
e. $1,334
a. $29,160
b. $32,400
c. $36,000
d. $40,000
e. $44,000
a. 25.09%
b. 27.59%
c. 30.35%
d. 33.39%
e. 36.73%
a. 10.86%
b. 12.07%
c. 13.41%
d. 14.90%
e. 16.55%
a. 16.05%
b. 16.90%
c. 17.74%
d. 18.63%
e. 19.56%
(16-9) Trade credit: EAR cost C S Answer: d MEDIUM
. Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. I
the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)
a. 20.11%
b. 21.17%
c. 22.28%
d. 23.45%
e. 24.63%
a. 14.34%
b. 15.10%
c. 15.89%
d. 16.69%
e. 17.52%
a. $18,493
b. $19,418
c. $20,389
d. $21,408
e. $22,479
a. $43,151
b. $45,308
c. $47,574
d. $49,952
e. $52,450
a. $53,699
b. $56,384
c. $59,203
d. $62,163
e. $65,271
a. $90,411
b. $94,932
c. $99,678
d. $104,662
e. $109,895
a. 10.59%
b. 11.15%
c. 11.74%
d. 12.36%
e. 13.01%
a. $612,750
b. $645,000
c. $677,250
d. $711,113
e. $746,668
Original Benchmarks’
Data Related CCC CCC
Sales $100,000
Cost of goods sold $80,000
Inventory (ICP) $20,000 91.25 38.00
Receivables (DSO) $16,000 58.40 20.00
Payables (PDP) $5,000 22.81 30.00
126.84 28.00
a. 1,901
b. 2,092
c. 2,301
d. 2,531
e. 2,784
a. $123,630
b. $130,137
c. $136,986
d. $143,836
e. $151,027
a. 60.3%
b. 63.5%
c. 66.7%
d. 70.0%
e. 73.5%
a. $32,964
b. $34,699
c. $36,526
d. $38,448
e. $40,370
a. 4.73
b. 5.26
c. 5.84
d. 6.42
e. 7.07
What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in
a. $72
b. $90
c. $108
d. $130
e. $156
Multiple Part:
Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The
turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the i
company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets
a. $8,418
b. $8,861
c. $9,327
d. $9,818
e. $10,309
a. 1.20%
b. 1.50%
c. 1.80%
d. 2.16%
e. 2.59%
a. 2.24%
b. 2.46%
c. 2.70%
d. 2.98%
e. 3.27%
CHAPTER 17
FINANCIAL PLANNING AND FORECASTING
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. Sales divided by total assets, i.e., the total assets turnover ratio.
b. The percentage of liabilities that increase spontaneously as a percentage of sales.
c. The ratio of sales to current assets.
d. The ratio of current assets to sales.
e. The amount of assets required per dollar of sales, or A*0/S0.
a. Assumptions are made about future levels of sales, costs, and interest rates for use in the forecast.
b. The entire financial plan is reexamined, assumptions are reviewed, and the management team considers how
c. Projected ratios are calculated and analyzed.
d. Develop a set of projected financial statements.
e. Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize pro
a. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it
b. The company increases its dividend payout ratio.
c. The company begins to pay employees monthly rather than weekly.
d. The company’s profit margin increases.
e. The company decides to stop taking discounts on purchased materials.
a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdo
b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
c. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compe
evaluated.
d. The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets.
e. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especial
a. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achievi
plans rather than broad approaches for achieving a firm's goals.
b. A firm’s corporate purpose states the general philosophy of the business and provides managers with specific
c. Operating plans provide management with detailed implementation guidance, consistent with the corporate s
be developed for any time horizon, but many companies use a 5-year horizon.
d. A firm’s mission statement defines its lines of business and geographic area of operations.
e. The corporate scope is a condensed version of the entire set of strategic plans.
a. Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN a
b. Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. B
operating with excess capacity in both fixed and current assets.
c. If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
d. Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, an
require explicit financing decisions to obtain them.
e. If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
a. Any forecast of financial requirements involves determining how much money the firm will need, and this ne
liabilities and then subtracting operating income.
b. The AFN equation for forecasting funds requirements requires only a forecast of the firm’s balance sheet. A
income statement data are not essential because funds needed relate only to the balance sheet.
c. Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy d
d. A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finan
e. If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the A
financial statement method.
a. The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external
equals zero.
b. If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be i
c. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually
previously calculated AFN.
d. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will
dividend payout ratio.
e. Dividend policy does not affect the requirement for external funds based on the AFN equation.
a. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A*0/S0 and L*0/S
b. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is
small increments as sales grow.
c. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in th
d. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed as
e. Regression techniques cannot be used in situations where excess capacity or economies of scale exist.
Problems
a. $312.5
b. $328.1
c. $344.5
d. $361.8
e. $379.8
a. $74.6
b. $78.5
c. $82.7
d. $87.0
e. $91.4
a. $170.09
b. $179.04
c. $188.46
d. $197.88
e. $207.78
(17-3) Excess capacity C K Answer: e MEDIUM
. Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used a
company could achieve before it had to increase its fixed assets?
a. 54.30%
b. 57.16%
c. 60.17%
d. 63.33%
e. 66.67%
a. 28.5%
b. 30.0%
c. 31.5%
d. 33.1%
e. 34.7%
a. 3.40
b. 3.57
c. 3.75
d. 3.94
e. 4.14
a. $102.8
b. $108.2
c. $113.9
d. $119.9
e. $125.9
(17-3) Negative AFN C K Answer: c MEDIUM/HARD
. Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you to forecast the firm's
below. Based on the AFN equation, what is the AFN for the coming year?
a. -$14,440
b. -$15,200
c. -$16,000
d. -$16,800
e. -$17,640
a. $31.9
b. $33.6
c. $35.3
d. $37.0
e. $38.9
a. $74.81
b. $78.75
c. $82.69
d. $86.82
e. $91.16