Which of the following statements is true of financial forecasts in the financial planning process?
A) The forecast of money the firm needs is estimated by adding the increases in assets and spontaneous liabilities and subtracting the operating income.
B) The projected balance sheet method of forecasting financial needs requires only a forecast of the firm's balance sheet.
C) The projected balance sheet method forces recognition of the fact that new financing creates additional financial obligations.
D) The projected balance sheet method of forecasting financial needs does not consider dividends paid out to shareholders as these are after tax payments from retained earnings.
E) Financing feedback describes the effect on the firm's stock price of the announcement that the firm will sell new equity or debt to raise the needed capital on its stock price.

Question

Quizplus · Accepted Answer

The projected balance sheet method of forecasting financial needs forces recognition of the fact that new financing creates additional financial obligations. It requires forecasting the firm's balance sheet and considering the impact of new financing on the firm's financial obligations. Choice A is incorrect because operating income is subtracted from increases in assets and spontaneous liabilities to determine the forecast of money available, not the forecast of money the firm needs. Choice B is incorrect because the projected balance sheet method of forecasting financial needs requires forecasting both the firm's income statement and balance sheet. Choice D is incorrect because the projected balance sheet method considers the effect of dividends paid on the firm's retained earnings, which in turn affects the firm's financial obligations. Choice E is incorrect because financing feedback refers to the effect of new equity or debt issuance on a firm's cost of capital, not its stock price.

Which of the Following Statements Is True of Financial Forecasts