Deck 9: Projecting Financial Statements

Question 1

"Additional funds needed" AFN) is the gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings.

Answer 1

True

Question 2

"First-round financing" usually occurs during a venture's rapid-growth life cycle stage.

Answer 2

False

Question 3

Sales forecasting accuracy is usually lowest during a venture's development stage in its life cycle.

Answer 3

True

Question 4

The added costs associated with obtaining equity capital are based on investor expected rates of return and are explicit costs which affect AFN.

Question 5

"Public or seasoned financing" typically occurs during the survival stage of a venture's life cycle.

Question 6

When using the beginning of period equity base, the sustainable sales growth rate is equal to ROE times the retention ratio.

Question 7

Forecasting for firms with operating histories is generally much easier than forecasting for early-stage ventures.

Question 8

Sales forecasting accuracy is usually highest during a venture's startup stage in its life cycle.

Question 9

The sustainable sales growth rate is equal to ROA times the retention ratio.

Question 10

A firm's maximum sustainable sales growth rate occurs at a retention ratio of 100%.

Question 11

The volatility of a firm's cash balance will steadily decreases as the firm progresses from the survival stage to the rapid-growth stage.

Question 12

The cost of obtaining additional funds, such as additional interest expenses from borrowing funds, may be explicit and impact AFN.

Question 13

Long-term financial planning begins with a forecast of annual working capital needs.

Question 14

Sales forecasts usually are based on either a single specific scenario or weighted averages of several possible realizations.

Question 15

A customer-driven or "bottom-up" approach to forecasting sales is used primarily to forecast industry sales growth rates.

Question 16

The rate at which a firm can grow sales based on the retention of business profits is known as sustainable sales growth rate.

Question 17

In a typical venture's life cycle, the rapid-growth stage involves creating and building value, obtaining additional financing, and examining exit opportunities.

Question 18

"Internally generated funds" is the cash produced from operating a firm over a specified time period.

Question 19

"Financial capital needed" FCN) is the amount of funds needed to acquire assets necessary to support a firm's sales growth.

Question 20

The weighted average of a set of possible outcomes or scenarios is known as expected values.

Question 21

Public or seasoned financing is generally associated with which one of the following life cycle stages:

A) development stage
B) startup stage
C) survival stage
D) rapid-growth stage
E) early-maturity stage

Question 22

Increases in accounts receivable and accounts payable that accompany sales increases are called "spontaneously generated funds".

Question 23

Which of the following statements is incorrect?

A) forecasting sales is the first step in creating projected financial statements
B) financial forecasting tends to be more accurate for mature ventures than for early-stage ventures
C) forecasting is relatively unimportant for early-stage ventures with little historical financial data
D) a and b
E) a and c

Question 24

Which one of the following life cycle stages would generally be associated with the second lowest sales forecasting accuracy?

A) early-maturity
B) rapid-growth
C) survival
D) start-up
E) development

Question 25

A firm with a positive growth rate in sales will require some additional funds, assuming the existing ratios will not be changed.

Question 26

Increases in accounts payable and notes payable are examples of spontaneously generated funds.

Question 27

Internally generated funds which are available for distribution to owners of for reinvestment back into the business to support future growth can be characterized by which of the following?

A) operating income
B) operating cash flow
C) net income
D) net cash flow
E) pre-tax income

Question 28

The constant ratio forecasting method makes projections based on the assumption that certain costs and some balance sheet items are best expressed as a percentage of sales.

Question 29

Preparing a projected statement of cash flows serves as check on the projected income statement and projected balance sheet.

Question 30

During which life cycle stage is a venture typically most accurate in forecasting sales?

A) rapid growth stage
B) startup stage
C) development stage
D) early-maturity stage
E) survival stage

Question 31

"Spontaneously generated funds" are increases in accounts receivable and accounts payable that accompany sales increases.

Question 32

The percent of sales forecasting method must project all cost and balance sheet items at the same growth rate as sales.

Question 33

Lola is in the process of forecasting the sales growth rate for an early-stage venture specializing in the production of durable running shoes. Lola predicts a .2 probability of an 80% growth in sales, a .3 probability of a 60% growth in sales, a .4 probability of a 40% growth in sales, and a .1 probability of a 10% decrease in sales. What is the expected sales growth rate of the venture?

A) 47%
B) 49%
C) 51%
D) 53%

Question 34

Which of the following is not part of the financial forecasting process used to project financial statements?

A) forecast sales
B) forecast tax rates
C) project the income statement
D) project the balance sheete project the statement of cash flows

Question 35

A firm projects net income to be $500,000, intends to pay out $125,000 in dividends, and had $2 million of equity at the beginning of the year. The firm's sustainable growth rate is:

A) 5%
B) 18.75%
C) 6.25%
D) 4.69%
E) none of the above

Question 36

Which of the following is not a step in forecasting sales for a seasoned firm?

A) forecast future growth rates based on possible scenarios and the probabilities of those scenarios.
B) attempt to corroborate the projected sales growth rates analyzing both industry growth rates and the firm's own past market share.
C) refine the sales forecast by using the sales force as a direct contact with both existing and potential customers.
D) take into consideration the likely impact of major operating changes within the firm on the sales forecast.
E) consider the effects of changes in the firm's debt/equity blend on the sales forecasts.

Question 37

The "constant-ratio forecasting method" is a variant of the "percent-of-sales forecasting method."

Question 38

A complete balance sheet and income statement mechanically imply a working statement of cash flows.

Question 39

During which round of financing is a venture typically most accurate in forecasting sales?

A) seasoned financing
B) mezzanine financing
C) first round financing
D) startup financing
E) seed financing

Question 40

An increase in accounts receivable will require additional financing unless the increase is offset by an equal decrease in another asset account.

Question 41

Which one of the following ratios is not part of the "standard" return on equity ROE) model?

A) net profit margin
B) asset turnover
C) equity multiplier
D) retention rate

Question 42

The increase in accounts payables and accruals that occur with a sales increase is called:

A) spontaneously generated funds
B) additional funds needed
C) addition in retained earnings
D) financial capital needed

Question 43

The financial funds still needed to finance asset growth after using spontaneously generated funds and any increase in retained earnings is called:

A) spontaneously generated funds
B) additional funds needed
C) addition in retained earnings
D) financial capital needed

Question 44

If beginning of period common equity is $200,000 and end of period common equity is $300,000, the sustainable growth rate is:

A) 33%
B) 40%
C) 50%
D) 67%
E) 75%

Question 45

Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm's AFN?

A) $200,000
B) $600,000
C) $840,000
D) $960,000
E) $1,400,000

Question 46

A firm has net income of $320,000 on sales of $3,200,000. Its assets total $2,000,000; the equity at the beginning of the year was $1,600,000 and dividends paid were $80,000. What is the sustainable growth rate?

A) 5%
B) 15%
C) 6.25%
D) 4.69%
E) none of the above

Question 47

Determine a firm's "return on assets" percentage based on the following information: sustainable growth rate = 20%; total assets $500,000; beginning of year common equity $200,000; and dividend payout percentage = 60%.

A) 10.0%
B) 12.5%
C) 15.0%
D) 17.5%
E) 20.0%

Question 48

A venture's common equity was $50,000 at the end of last year. If the venture's common equity at the end of this year was $60,000, what was its sustainable sales growth rate?

A) 5%
B) 10%
C) 15%
D) 20%
E) 25%

Question 49

If a venture has a return on assets ROA) = 10%, an equity multiplier based on beginning equity = 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be:

A) 10%
B) 16%
C) 20%
D) 24%
E) 40%

Question 50

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%.

A) 10%
B) 16%
C) 20%
D) 24%
E) 30%

Question 51

The financial funds needed to acquire assets necessary to support a firm's sales growth is called:

A) spontaneously generated funds
B) additional funds needed
C) addition in retained earnings
D) financial capital needed

Question 52

Which one of the following would increase a firm's need for additional funds?

A) an increasing profit margin
B) a decreasing expected sales growth rate
C) an increase in accruals
D) an increasing dividend payout rate
E) a decrease in assets

Question 53

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and the retention rate = 50%.

A) 10%
B) 15%
C) 20%
D) 25%
E) 30%

Question 54

A venture's common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate?

A) 5%
B) 10%
C) 15%
D) 20%
E) 25%

Question 55

If a venture has a return on assets ROA) = 12%, an equity multiplier based on beginning equity = 3.0 times, and a sustainable growth rate of 18%, the retention rate would be:

A) 10%
B) 20%
C) 30%
D) 40%
E) 50%

Question 56

Which of the following is a forecasting method used to project financial statements?

A) percent-of-sales method
B) percent-of-expenses method
C) GNP-ratio method
D) a and b
E) a, b, and c

Question 57

A 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

Question 58

Use the following information to estimate a venture's sustainable growth rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25%.

A) 50%
B) 25%
C) 20%
D) 10%
E) 5%

Question 59

If a venture has a return on assets ROA) = 10%, an equity multiplier based on beginning equity = 3.5 times, and a retention rate = 50%, the sustainable growth rate would be:

A) 10%
B) 17.5%
C) 35%
D) 40%
E) 20.5%

Question 60

Determine a firm's "financial policy" multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2 times.

A) 1.00
B) 1.25
C) 1.50
D) 1.75
E) 2.00