Chapter 15-Financial Planning: Multiple Choice

Chapter 15—Financial Planning
MULTIPLE CHOICE
1. A sales forecast that relies heavily on macroeconomic and industry forecasts is called a
a. top-down forecast
b. bottom-up forecast
c. plug figure
d. none of the above
ANS: A PTS: 1 DIF: E REF: 15.2 Planning for Growth
NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
2. The short-term financing strategy where a company relies heavily on short term borrowing to finance a
portion of their long term growth is called a(n)
a. conservative strategy
b. aggressive strategy
c. matching strategy
d. growth strategy
ANS: B PTS: 1 DIF: E REF: 15.3 Planning and Control
3. The statement of the firm’s planned inflows and outflows of cash is called a(n)
a. income statement
b. balance sheet
c. cash budget
ANS: C PTS: 1 DIF: E REF: 15.3 Planning and Control
4. The growth rate at which a company can grow without issuing new shares of common stock while
maintaining a constant total asset turnover and equity multiplier is called a(n)
a. internal growth rate
b. sustainable growth rate
c. optimal growth rate
d. maximal growth rate
ANS: B PTS: 1 DIF: E REF: 15.2 Planning for Growth
5. The method in which pro forma statements are constructed by assuring that all items grow in
proportion to sales is called the
a. percentage of sales method
b. common size method
c. sales dilution method
d. sales receipt method
Smith Enterprises
Balance Sheet
Current Assets $400Accounts Payable $145
Fixed Assets 500Long-term Debt 455
Equity 300
Total $900Total 900
Income Statement for End of Year

Sales $450
Costs 180
Taxable Inc. 270
Tax (at 34%) 92
Net Income 178
6. Using the percentage of sales method what will be Smith’s net income if sales are expected to increase
by 25%?
a. $222.75
b. $562.50
c. $225.00
d. $337.50
ANS: A
new sales = 562.50
new costs = 562.50(180/450) = 225
taxable income = 337.50
taxes = 114.75
new net income = 222.75
PTS: 1 DIF: E REF: 15.2 Planning for Growth

NAT: Analytic skills
7. If Smith pays out 25% of their projected net income as dividends, what will be the company’s addition
to retained earnings, if sales grow by 25% and all items on the income statement grow proportionally
with sales?
a. $222.75
b. $55.68
c. $167.07
d. $107.25
ANS: C
new net income: 222.75
add. to R/E = 222.75(1-.25) = 167.07
PTS: 1 DIF: E REF: 15.2 Planning for Growth

8. What is Smith’s sustainable growth rate if the company has a dividend payout ratio of 75%?
a. 21.70%
b. 25.00%
c. 17.44%
d. 13.58%
ANS: C
m = 178/450 = .396
g = [.396(1-.75)900/300]/[(900/450)-.396(1-.75)900/300]
g = .1744
PTS: 1 DIF: M REF: 15.2 Planning for Growth

9. If Smith pays out 75% of net income as dividends and sales are expected to grow by 25%, what are the
external funds required?
a. $133.06
b. $66.88
c. $121.88
d. $225.58
ANS: A
S = 450(.25) = 112.50
EFR = (900/450)112.50 - (145/450)112.50 - (.396)450(1+.25)(1-.75)
EFR = 133.06

10. If sales are expected to grow at 15% what are Smith’s retained earnings next year? Assume a constant
profit margin and a dividend payout ratio of 50%.
a. $123.05
b. $246.10
c. $213.99
d. $102.47
ANS: D
m =178/450 = .396
R/E = 450(.396)(1+.15)(1-.5) = 102.47

Bavarian Brew’s schedule of projected cash disbursement

Jan Feb Mar Apr
Sales $510 $870 $450 $600
All of Bavarian Brew’s sales are credit sales. The company collects 60% of its sales in the next month
and the remainder in the month after that.
11. What are Bavarian Brew’s cash collections in March?

a. $726
b. $654
c. $324
d. $522
ANS: A
(.4)510 + .6(870) = 726
PTS: 1 DIF: E REF: 15.3 Planning and Control

12. What is the value of Bavarian Brew's receivables account at the end of February?
a. $1074
b. $306
c. $204
d. $348
ANS: A
.4(510) + 870 = 1074

13. What are the Bavarian Brew’s cash collections in April?

a. $528
b. $618
c. $702
d. $835
ANS: B
450(.6) + 870(.4) = 618

14. What is the value of Bavarian Brew's receivables at the end of April?
a. $780
b. $180
c. $600
d. $270
ANS: A
600 + 180 = 780

15. Due to a change in economic conditions Bavarian Brew will only be able to collect 40% of its March
sales in April. What is the effect on the company’s cash receipts in April as a result of this change?
a. cash receipts decline by $180
b. cash receipts decline by $90
c. cash receipts increase by $270
d. cash receipts increase by $90
ANS: B
before: 450(.6) + 870(.4) = 618
now: 450(.4) + 870(.4) = 528
change 528-618 = -90


Jan Feb Mar Apr
Sales $510 $870 $450 $600
The company’s purchases are 75% of its sales. Of those purchases 15% are paid in cash, 50% are paid
in the following month and the remainder in the month after that. The company’s wages and salaries
equal 15% of sales each month plus $50. Taxes of $125 are due in April. The company is going to
purchase new machinery worth $1000 in March and pay 50% right away and the rest in April. In
addition, the company will pay a $175 dividend in February.
16. What are the cash disbursements for February? Assume Bavarian Brew had sales of $490 in
December.
a. $598.25
b. $773.25
c. $548.25
d. $419.65
ANS: B
.75(870)(.15) + 510(.75)(.5) + 490(.75)(.35) + 50 + 870(.15) + 175 = 773.25
PTS: 1 DIF: M REF: 15.3 Planning and Control

17. What is the value of the Bavarian Brew’s accounts payable at the end of February? Assume the
company had sales of $490 in December.
a. $688.50
b. $738.50
c. $638.50
d. $869.00
ANS: A
510(.75)(.35) + 870(.75)(.85) = 688.50

18. What are Bavarian Brew’s cash disbursements in April?

a. $1,1046.63
b. $729.63
c. $679.63
d. $1,229.63
ANS: D
600(.75)(.15) + 450(.75)(.5) + 870(.75)(.35) + 50 + 600(.15) + 125 + 1000(.5) = 1229.63

19. What is the value of Bavarian Brew's accounts payable at the end of April?
a. $346.63
b. $500.63
c. $1,000.63
d. $754.63
ANS: B
600(.75)(.85) + 450(.75)(.35) = 500.63

20. What is the value of Bavarian Brew's accounts payable at the end of March?
a. $515.25
b. $755.25
c. $1,515.25
d. $1,015.25
ANS: D
450(.75)(.85) + 870(.75)(.35) + 1000(.5) = 1,015.25

21. What are Bavarian Brew’s cash disbursements in March?

a. $1,128.25
b. $510.75
c. $750.75
d. $1,260.75
ANS: A
450(.75)(.15) + 870(.75)(.50) + 510(.75)(.35) + 1000(.5) + 450(.15) + 50 = 1128.25


Jan Feb Mar Apr
Sales $510 $870 $450 $600
All of Bavarian Brew’s sales are credit sales. The company collects 60% of its sales in the next month
and the remainder in the month after that.
The company’s purchases are 75% of its sales. Of those purchases 15% are paid in cash, 50% are paid
in the following month and the remainder in the month after that. The company’s wages and salaries
equal 15% of sales each month plus $50. Taxes of $125 are due in April. The company is going to
purchase new machinery worth $1000 in March and pay 50% right away and the rest in April. In
addition, the company will pay a $175 dividend in February.
22. If Bavarian Brew starts the year with a cash balance of $500, what is the cash balance at the end of
January? Assume that December sales were $450 and November sales were $550.
a. $483
b. $493
c. $497
d. $500
ANS: B
in: (.4)550 + (.6)450 = 490
out: (.35)(.75)(550) + (.5)(.75)(450) + (.15)(.75)(510) + 50 + (.15)(510) = 497
cash balance: 500+490-497 =493

23. What is Bavarian Brew’s expected net cash flow in March?

a. -$402.25
b. $402.25
c. $726
d. -$1,128.25
ANS: A
in: (.6)870 + .4(510) = 726
out: (.35)(.75)(510) + (.5)(.75)870 + (.15)(.75)450 + 50 + 450(.15) + 1000(.5) = 1128.25
net = 726-1128.25 = -402.25

24. If the cash balance at the beginning of March is $250, what is Bavarian Brew's cash balance at the end
of the month?
a. $250
b. -$152.25
c. $652.25
d. -$652.25
ANS: A
in: 726
out: 1128.25
cash balance: 250 + 726 - 1128.25 = -152.25

25. Due to a change in economic conditions Bavarian Brew will only be able to collect 40% of its March
sales in April. What is company’s cash net cash flow in April as a result of this change?
a. $528
b. $1229.63
c. -$701.63
d. $701.63
ANS: C
in .4(870) + .4(450) = 528
out: (.35)(.75)(870) + (.5)(.75)(450) + (.15)(.75)(600) + 50 + (.15)(600) + 125 + (.5)(1000) = 1229.63
net 528-1229.63 = -701.63

26. Which of the following most likely is not a question asked in long-term financial planning?
a. What threats to our current business exist?
b. What is (are) our core competency(ies)?
c. Can we do better by leaving markets (selling assets) and investing elsewhere?
d. Should we acquire new vending machines for the employees’ breakrooms?
ANS: D PTS: 1 DIF: E
REF: 15.1 Overview of the Planning Process NAT: Reflective thinking
27. A firm can grow more rapidly if (consider each in isolation):

a. it pays larger dividends.
b. it uses less debt.
c. its asset to sales ratio is larger.
d. its profit margin is larger.
ANS: D PTS: 1 DIF: E REF: 15.2 Planning for Growth
28. The rate at which a firm can grow without issuing any new shares of stock while keeping its dividend
policy, financial policy, and profitability constant is the
a. optimal growth rate
b. marginal growth rate
c. sustainable growth rate
d. theoretical growth rate
ANS: C PTS: 1 DIF: E REF: 15.2 Planning for Growth
29. Suppose a firm forecasts sales growth larger than its sustainable growth rate, but plans to add fewer
assets than the current asset to sales ratio implies. If other aspects of the firm’s performance remain
constant, the pro forma external funds required (EFR)
a. will likely be larger than the sustainable growth rate implies.
b. will likely be smaller than the sustainable growth rate implies.
c. will likely be the same as the sustainable growth rate implies.
d. cannot be determined from this information.
ANS: B PTS: 1 DIF: M REF: 15.2 Planning for Growth
30. Suppose a firm experiences a seasonal pattern in its sales, in addition to a long-term upward trend.
Which of the following financing plans has the potential to be less costly to the firm?
a. a conservative strategy
b. an aggressive strategy
c. a matching strategy
d. they are equally likely to be low-cost
31. Suppose a firm experiences a seasonal pattern in its sales, in addition to a long-term upward trend.
Which of the following financing plans has the potential to be less risky to the firm?
a. a conservative strategy
b. an aggressive strategy
c. a matching strategy
d. They are equally likely to be low-risk.
ANS: A PTS: 1 DIF: E REF: 15.3 Planning and Control
32. DigIt! Corporation has the following financial information: its profit margin is 10%, its total asset
turnover is 1.75, its assets to equity ratio is 1.5, and it pays out 35% of its earnings in dividends. What
is its sustainable growth rate?
a. 22.10%
b. 20.57%
c. 9.75%
d. 47.39%
ANS: B PTS: 1 DIF: E REF: 15.2 Planning for Growth
33. DigIt! Corporation has the following financial characteristics: its profit margin is 10%, its total asset
turnover is 1.75, its asset to equity ratio is 1.5 and its sustainable growth rate is 20.6%. What dividend
payout ratio is consistent with these values?
a. 45%
b. 55%
c. 65%
d. 35%
ANS: D PTS: 1 DIF: M REF: 15.2 Planning for Growth
34. Big Deal, Inc. wants to grow 30% next year. If it maintains its 40% dividend payout ratio, liabilities to
equity ratio of 1, and total asset turnover of 2, what must its profit margin be to achieve this growth?
a. 9.6%
b. 25.8%
c. 38.5%
d. 51.2%
ANS: A PTS: 1 DIF: M REF: 15.2 Planning for Growth
35. If a company has a liabilities to equity ratio of 0.5, then its assets to equity ratio is
a. 0.5
b. 1.0
c. 1.5
d. 2.0
ANS: C PTS: 1 DIF: M REF: 15.2 Planning for Growth
36. MoMoney Co. wants to increase its sustainable growth rate to 10%. If it maintains its 15% profit
margin, 25% retention ratio, and 0.25 liabilities to equity ratio, what must its total asset turnover value
be?
a. 0.42
b. 0.65
c. 1.94
d. 2.37
ANS: C PTS: 1 DIF: H REF: 15.2 Planning for Growth
Kooshy Company
Income Statement
December 31, 2005
($ 000,000)
Sales 800.0
Cost of Goods Sold 576.0
Depreciation 55.0
Operating Expenses 88.0
Other Expenses 4.8
EBIT 76.2
Interest Expense 6.9
EBT 69.3
Taxes (40%) 27.7
Net Income 41.6
Dividends 4.16
Balance Sheet
December 31, 2005
($ 000,000)
Cash 10.0Accounts Payable 63.0
Accounts Receivable 81.0Notes Payable 42.0
Inventory 69.0Total Current Liabilities 105.0
Total Current Assets 160.0 Long-term Debt 80.0
Net Fixed Assets 275.0Owners’ Equity 250.0
Total Assets 435.0 Total Liabilities and Equity 435.0
37. If Kooshy Company forecasts a 20% sales increase, what will its pro forma cost of goods sold be,
assuming it remains at the same percent of sales?
a. $576
b. $635
c. $691
d. $720
38. Suppose Kooshy wishes to maintain a minimum $10 million cash balance, accounts receivable are
forecast to be 15% of sales, and inventory is expected to be 12% of forecast sales. Also, the firm plans
to add $35 million to fixed assets (depreciate the additional assets over seven years). What is the pro
forma level of total assets if sales are forecasted to increase 20%?
a. $487
b. $435
c. $519
d. $615
ANS: C PTS: 1 DIF: H REF: 15.2 Planning for Growth
39. Refer to Kooshy. Suppose pro forma net income is $50 and pro forma total assets are $525. If accounts
payable maintain the same percent of sales, no new long term debt is issued, and the only addition to
owners’ equity is to retained earnings, what will be the pro forma balance in notes payable for a
forecasted 20% increase in sales? (That is, use notes payable as the balancing account.)
a. $39
b. $74
c. $83
d. $4
ANS: B PTS: 1 DIF: H REF: 15.2 Planning for Growth
40. Kooshy Company wishes to maintain its dividend policy in the upcoming year. What will be the pro
forma addition to retained earnings if sales are forecasted to increase 20% and all costs are
proportional to sales?
a. $5
b. $37
c. $50
d. $45
41. Using ratios derived from the income statement and balance sheet above, what is Kooshy Company’s
sustainable growth rate?
a. 10.6%
b. 17.7%
c. 20.00%
d. 8.1%
ANS: B PTS: 1 DIF: M REF: 15.2 Planning for Growth
42. Using ratios derived from the income statement and balance sheet above, what is Kooshy Company’s
“shorthand” estimate of external funds required (EFR) for a 20% increase in sales?
a. -$4
b. $0
c. $29
d. $160
Silly Sally, Inc.

Silly Sally, Inc. forecasts the following sales levels: January, $420; February, $435; March, $450; and
April, $470. Historically, 40% of its sales are for cash. Of the remaining sales, 80% are collected in
one month, 15% are collected in the second month, while the rest remain uncollected. November sales
were $380 and December sales were $500. (all values $000)
Purchases are made at 60% of the next month’s sales forecast, and are paid for in the month of
purchase. Other cash outlays are: rent, $10 monthly; wages and salaries, $50 monthly; a tax payment
of $30 in March; an interest payment of $15 in March; and a planned purchase of $20 of new fixed
assets in January.
43. Refer to Silly Sally, Inc. What is the forecasted amount to be collected from cash sales in March?
a. $450
b. $360
c. $261
d. $180
ANS: D PTS: 1 DIF: M REF: 15.3 Planning and Control
44. Refer to Silly Sally, Inc. What are forecasted total cash collection for January?
a. $420
b. $442
c. $168
d. $240
ANS: B PTS: 1 DIF: M REF: 15.3 Planning and Control
45. Suppose Silly Sally, Inc. forecasts an ending cash balance of $20, its minimum desired balance, in
January. If February’s forecasted cash expenditures are $400, which of the following describes the
changes to Silly Sally’s cash balance and level of borrowing, if any, related to its minimum cash
balance, at the end of February?
a. net cash flows of $21; borrowing will increase $21
b. net cash flows of $21; borrowing will decrease $21
c. net cash flows of $11; borrowing will increase $9
d. net cash flows of $11; borrowing will decrease $9
46. What are Silly Sally’s forecasted cash outflows for February?
a. $270
b. $330
c. $395
d. $450
47. What is Silly Sally’s change in cash for March?

a. $40 increase in cash
b. $40 decrease in cash
c. $85 increase in cash
d. $20 increase in cash
ANS: A PTS: 1 DIF: H REF: 15.3 Planning and Control
48. Suppose Silly Sally experiences a change in customer payment patterns in accounts receivable, so that
payments are now 30% in cash, and of the credit sales, 60% are collected in one month, 35% are
collected in the second month, with the rest uncollected. What is the new forecasted collection for
January, and how much is this different from the original forecast?
a. $408; $72 higher
b. $336; $93 lower
c. $442; $13 higher
d. $429; $13 lower
ANS: D PTS: 1 DIF: H REF: 15.3 Planning and Control
49. Consider the following information for Smart Products: total assets=$1000; sales=$1540; net profit
margin=12%; dividend payout ratio=40%; accounts payable=$308. If sales are forecast to increase
30%, what is the “short cut” estimate of external funds required (EFR)?
a. $64
b. $208
c. $300
d. $462
50. Consider the following information for Smart Products: total assets=$1000; sales=$1540; net profit
margin=12%; dividend payout ratio=40%; equity=$555. What is Smart Products’ sustainable growth
rate?
a. 7%
b. 13%
c. 25%
d. 52%
51. Financial planning encompasses all but the following:

a. setting long-run strategic goals
b. investing the firms long-term cash
c. preparing quarterly and annual budgets
d. all of the above
ANS: B PTS: 1 DIF: E REF: Introduction
52. Which of the following make(s) the planning process more complex than simply accepting all projects
that look promising?
a. limits on capital
b. limits on production capacity
c. limits on human resources
d. all of the above
ANS: D PTS: 1 DIF: E REF: Introduction
53. With regard to planning, the first priority for a firm that competes by achieving lowest cost production
might be
a. to determine whether it should make additional investments in order to achieve even
greater production efficiencies.
b. to assess whether new or expanded marketing programs might increase the value of the
brand relative to those of competitors.
c. to intensify its efforts to further discriminate its brand from that of its competitors.
d. all of the above.
ANS: A PTS: 1 DIF: E
54. The multiyear action plan for the major investments and competitive initiative that the firm’s managers
believe will drive the future success of the enterprise is called
a. the firm’s rollout plan.
b. the tactical plan.
c. the strategic plan.
d. none of the above.
ANS: C PTS: 1 DIF: E
55. The responsibility to assess the feasibility of a strategic plan given a firm’s existing and prospective
sources of funding falls primarily to the
a. senior management of the firm.
b. finance function within the firm.
c. accounting function within the firm.
d. marketing function within the firm.
ANS: B PTS: 1 DIF: E
56. Increases in assets must be accompanied by

a. an increase in liabilities.
b. an increase in owners equity.
c. equal amounts of a) and b).
d. some combination of a) and b).
57. For the prior year, Billy Bob’s Dress Shop had a net profit margin of 5% based upon a sales level of
$100,000. It’s total assets are $1,000,000 while its total equity is $300,000. If Billy Bob pays out 50%
of its net income in dividends, then what is the firm’s sustainable growth rate going forward?
a. .84%
b. 8.00%
c. 8.40%
ANS: A
g* = {m(1-d)(A/E)} / [(A/S) - {m(1-d)(A/E)}]
A/S = 10, A/E = 3.3333, m = .05, (1-d) = .5
g* = .0084 or .84%

58. In the year just ended, Ellie May’s Power Tools had net income of $200,000 based upon a sales level
of $1,500,000. It’s total assets are $800,000 while its total equity is $700,000. If Ellie May pays out
0% of its net income in dividends, then what is the firm’s sustainable growth rate going forward?
a. .40%
b. 38%
c. 40%
ANS: C
g* = {m(1-d)(A/E)} / [(A/S) - {m(1-d)(A/E)}]
A/S = 8/15, A/E = 8/7, m = 200,000/1,500,000, (1-d) = 1
g* = .4

59. You are a financial consultant to a company that asks you what effect a change in leverage has on the
firm’s sustainable growth. Assuming all other things remain constant and if the percentage of assets
that are financed with debt increases, then how will that affect the firm’s sustainable growth rate?
a. the sustainable growth rate will decrease
b. the sustainable growth rate will increase
c. the effect is indeterminable
d. the sustainable growth rate will neither decrease or increase
ANS: B PTS: 1 DIF: H REF: 15.2 Planning for Growth
60. A top-down approach to sales forecasting begins with

a. a firmwide sales objective.
b. a departmental head forecast.
c. a talk with the customer.
61. A bottom-up approach to sales forecasting begins with

a. a firmwide sales objective.
b. a departmental head forecast.
c. a talk with the customer.
62. The percentage-of-sales method for forecasting pro forma financial statements assumes
a. that all income statement and balance sheet items grow in proportion to sales.
b. that all income statement and balance sheet items grow at a growing proportion to sales.
c. that all income statement and balance sheet items grow at a decreasing proportion to sales
63. The Retail Company currently has assets of $3,000,000 and accounts payable of $200,000. The firm’s
sales last year were $10,000,000 with a net profit margin of 1%. If the firm anticipates next year’s
sales to grow by 8% over that of last year and the firm pays out 25% of its net income in dividends,
then what is the estimated external funds requirement for Retail?
a. $16,000
b. $81,000
c. $143,000
d. $240,000
ANS: C
EFR = S (A/S) - S (AP/S) - mS(1+g)(1-d)
S = .08  10,000,000 = 800,000
EFR = 800,000 (3/10) - 800,000 (.2/10) - .01 (10,000,000)(1.08)(1-.25) = 143,000
PTS: 1 DIF: H REF: 15.2 Planning for Growth

64. A firm currently has $2,000,000 in assets and $1,000,000 in accounts payable. If the firm expects sales
to increase by 10% from last year to next year, then what is the estimated external funds required if the
firm pays all of its net income to shareholders?
a. $100,000
b. $1,000,000
c. $2,000,000
ANS: A
EFR = S (A/S) - S (AP/S) - mS(1+g)(1-d), since d = 1,
EFR = S (A/S) - S (AP/S) = A (S/S) - AP (S/S) = Ag - APg = g(A - AP)
EFR = .1 (2,000,000 -1,000,000) = 100,000

65. Milton Gaming Company currently has assets of $3,000,000 and accounts payable of $200,000. The
firm’s sales last year were $10,000,000. If the firm anticipates next year’s sales to grow by 8% over
that of last year and the firm pays out 25% of its net income in dividends, then what net profit margin
is required in order to have the estimated external funds required be equal to zero?
a. 27.00%
b. 25.00%
c. 2.77%
d. 2.50%
ANS: C
EFR = S (A/S) - S (AP/S) - mS(1+g)(1-d)
S = .08  10,000,000 = 800,000
800,000 (3/10) - 800,000 (.2/10) - m (10,000,000)(1.08)(1-.25) = 0
224,000 = m (10,000,000)(1.08)(.75); m = .02765

66. Which of the following is a source of discretionary or external financing?

a. a new debt issue
b. accounts payable
c. a new equity issue
d. both a and c
67. If a company prefers to finance its required assets with a larger portion of short-term debt, then that
firm is utilizing a(n)
a. conservative financing strategy.
b. aggressive financing strategy.
c. matching strategy.
68. If a company prefers to finance its required assets with a small portion of short-term borrowings, then
that firm is utilizing a(n)
a. conservative financing strategy.
b. aggressive financing strategy.
c. matching strategy.
69. A firm that tends to finance permanent assets with long-term debt and seasonal assets with short-term
borrowing is following
a. an aggressive financing strategy.
b. a conservative financing strategy.
c. a matching financing strategy.
70. Cash receipts include

a. cash sales.
b. accounts receivable collections.
c. both a and b
71. The Little Toy Company will start doing business in February and needs to forecast its total cash
receipts for April. Its projected total sales are $15,000, $20,000, and $25,000 for February, March and
April, respectively. Little Toy anticipates that 50% of sales will be for cash and 1/2 of credit sales will
be collected the month after sale with the remained being collected 2 months after the sale. What the
forecasted cash receipts to Little Toy in April?
a. $21,250
b. $17,500
c. $8,750
ANS: A
April cash sales: 25,000  .5 = 12,500
April collections for March sales: 20,000  .5  .5 = 5,000
April collections for Feb sales: 15,000  .5  .5 = 3,750
April total collections: 12,500 + 5,000 + 3,750 = 21,250
PTS: 1 DIF: H REF: 15.3 Planning and Control

72. Marsha Start is looking to restart a home economics related business after an unfortunate incarceration.
She forecasts that sales for June, July, and August will be $100,000, $150,000, and $100,000,
respectively. Start expects for cash sales to make up 25% of the sales in each month with 90% of the
credit sales collected in the month after the sale and the remainder 2 months after the sale. What is
Start’s estimated total cash collections for August?
a. $20,000
b. $101,750
c. $133,750
ANS: C
August cash sales: 100,000  .25 = 25,000
August collections for July: 150,000  .75  .9 = 101,250
August collections for June: 100,000  .75  .1 = 7,500
Total cash collections for August: 25,000 + 101,250 + 7,500 = 133,750

73. Marsha Start is looking to restart a home economics related business after an unfortunate incarceration.
She forecasts that sales for June, July, and August will be $100,000, $150,000, and $80,000,
respectively. Start expects for cash sales to make up 25% of the sales in each month with 90% of the
credit sales collected in the month after the sale and the remainder 2 months after the sale. What is
Start’s estimated total cash collections in August for June sales?
a. $7,500
b. $101,750
c. $133,750
ANS: A
June credit sales: .75  100,000 = 75,000
August collections in June: 75,000  .1 = 7,500

Exhibit 15-1
You are working to forecast the cash disbursements for a manufacturing company. Sales are forecasted
to be $175,000, $200,000, $225,000, and $250,000 for January, February, March, and April,
respectively. The firm purchases 25% of each amount in cash and will then pay 70% of the credit
purchase in the month following the purchase with the remainder paid in full two months after the
purchase.
74. Refer to Exhibit 15-1. What is the amount of February sales to be collected in March for the company?
a. $206,625
b. $105,000
c. $56,250
ANS: B
Feb Sales: 200,000
Credit sales in Feb: 200,000  .75 = 150,000
Feb sales collections in March: 150,000  .7 = 105,000

75. Refer to Exhibit 15-1. What is the amount of February sales to be collected in April for the company?
a. $206,625
b. $105,000
c. $45,000
ANS: C
Feb Sales: 200,000
Credit sales in Feb: 200,000  .75 = 150,000
Feb sales collections in March: 150,000  .3 = 45,000

76. Which of the following roles does finance play in long-term planning?
a. Assessing the likelihood that a given strategic objective can be achieved.
b. Evaluating the firm's existing and prospective sources of funding.
c. Preparing and updating cash budgets to ensure the firm does not face a liquidity crisis.
d. all of the above
e. (b) and (c) only
ANS: D PTS: 1 DIF: M
77. Which of the following roles does finance play in long-term planning?
a. Identifying problems that could develop if the firm's strategic plans do not develop as
expected.
b. Evaluating the firm's existing and prospective sources of funding.
c. Risk management
d. All of the above
e. (a) and (b) only
ANS: D PTS: 1 DIF: M
78. Which of the following is not a popular growth target?

a. Return on Investment
b. Economic Value Added
c. Market Value Added
d. Growth in Sales or Assets
79. Economic Value Added (EVA) is:

a. the difference between net income and the cost of goods sold.
b. the difference between operating profit and the cost of funds.
c. the difference between net income and the cost of funds.
d. the difference between net operating profits after taxes and the cost of funds.
e. none of the above
NAT: Reflective thinking LOC: understand stocks and bonds
80. Which of the following statements is false?

a. The EVA method is conceptually valid but due to the disconnect it has between accrual-
based accounting and economic value coupled with increased computational complexity, it
is not the most popular method for growth planning.
b. Firms generally assumed that if ROI is greater than the firm's cost of capital then
shareholder value will be created.
c. One of the typical growth targets is depreciation.
d. The popular growth targets tend to rely on accounting data and are typically measured on
an annual basis.
81. Which of the following statements is false?

a. A firm should set its growth target equal to its sustainable growth rate.
b. Generating a higher profit margin provides fuel for a higher sustainable growth rate,
holding everything else equal.
c. The sustainable growth concept can highlight tensions associated with "competing"
objectives within the firm.
d. The primary advantage of the sustainable growth model is its simplicity.
82. The cash budget:

a. is the same as a bank statement.
b. typically spans a one-year time period.
c. relies upon the sales forecast as a key input.
d. is a statement of the firm's planned inflows and outflows of cash.
e. All of the above except (a)
ANS: E PTS: 1 DIF: M REF: 15.3 Planning and Control
83. If a firm's ending cash balance exceeds the desired minimum cash balance:
a. the firm has an excess cash balance that it can invest in short-term marketable securities.
b. the firm has a short-term financing need that it can meet using notes payable.
c. the firm has an excess cash balance that it can meet using notes payable.
d. the firm has a short-tern financing need that it can meet using marketable securities.
84. Which of the following statements is/are true?

a. Almost any functional area in the firm can affect, or be affected by, the cash budget.
b. The cash budget typically only impacts the financing area of the firm.
c. Even if a firm's cash budget shows that it will have a month-end cash surplus, it may be
faced with intramonth cash shortages.
d. All of the above statements are true.
e. Only (a) and (d) are true.
ANS: E PTS: 1 DIF: M REF: 15.3 Planning and Control

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Chapter 15—Financial Planning

Income Statement for End of Year

PTS: 1 DIF: E REF: 15.2 Planning for Growth

PTS: 1 DIF: E REF: 15.2 Planning for Growth

PTS: 1 DIF: M REF: 15.2 Planning for Growth

PTS: 1 DIF: M REF: 15.2 Planning for Growth

PTS: 1 DIF: M REF: 15.2 Planning for Growth

Bavarian Brew’s schedule of projected cash disbursement

11. What are Bavarian Brew’s cash collections in March?

PTS: 1 DIF: E REF: 15.3 Planning and Control

PTS: 1 DIF: E REF: 15.3 Planning and Control

13. What are the Bavarian Brew’s cash collections in April?

PTS: 1 DIF: E REF: 15.3 Planning and Control

PTS: 1 DIF: E REF: 15.3 Planning and Control

PTS: 1 DIF: E REF: 15.3 Planning and Control

Bavarian Brew’s schedule of projected cash disbursement

PTS: 1 DIF: M REF: 15.3 Planning and Control

PTS: 1 DIF: M REF: 15.3 Planning and Control

18. What are Bavarian Brew’s cash disbursements in April?

PTS: 1 DIF: M REF: 15.3 Planning and Control

PTS: 1 DIF: M REF: 15.3 Planning and Control

PTS: 1 DIF: M REF: 15.3 Planning and Control

21. What are Bavarian Brew’s cash disbursements in March?

PTS: 1 DIF: M REF: 15.3 Planning and Control

Bavarian Brew’s schedule of projected cash disbursement

PTS: 1 DIF: M REF: 15.3 Planning and Control

23. What is Bavarian Brew’s expected net cash flow in March?

PTS: 1 DIF: M REF: 15.3 Planning and Control

PTS: 1 DIF: M REF: 15.3 Planning and Control

PTS: 1 DIF: M REF: 15.3 Planning and Control

27. A firm can grow more rapidly if (consider each in isolation):

Silly Sally, Inc.

47. What is Silly Sally’s change in cash for March?

51. Financial planning encompasses all but the following:

56. Increases in assets must be accompanied by

A/S = 10, A/E = 3.3333, m = .05, (1-d) = .5

PTS: 1 DIF: M REF: 15.2 Planning for Growth

A/S = 8/15, A/E = 8/7, m = 200,000/1,500,000, (1-d) = 1

PTS: 1 DIF: M REF: 15.2 Planning for Growth

60. A top-down approach to sales forecasting begins with

61. A bottom-up approach to sales forecasting begins with

EFR = 800,000 (3/10) - 800,000 (.2/10) - .01 (10,000,000)(1.08)(1-.25) = 143,000

PTS: 1 DIF: H REF: 15.2 Planning for Growth

EFR = S (A/S) - S (AP/S) = A (S/S) - AP (S/S) = Ag - APg = g(A - AP)

EFR = .1 (2,000,000 -1,000,000) = 100,000

PTS: 1 DIF: H REF: 15.2 Planning for Growth

S = .08  10,000,000 = 800,000

800,000 (3/10) - 800,000 (.2/10) - m (10,000,000)(1.08)(1-.25) = 0

224,000 = m (10,000,000)(1.08)(.75); m = .02765

PTS: 1 DIF: H REF: 15.2 Planning for Growth

66. Which of the following is a source of discretionary or external financing?

70. Cash receipts include

April total collections: 12,500 + 5,000 + 3,750 = 21,250

PTS: 1 DIF: H REF: 15.3 Planning and Control

August collections for July: 150,000  .75  .9 = 101,250

August collections for June: 100,000  .75  .1 = 7,500

Total cash collections for August: 25,000 + 101,250 + 7,500 = 133,750

PTS: 1 DIF: H REF: 15.3 Planning and Control