Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed 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 operational objectives.
c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can 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.
Answer Choices:
a. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed 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 operational objectives.
c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can 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.
Answer: c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
Question: Which of the following statements is CORRECT?
Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management’s historical performance is evaluated.
The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets.
The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy and economies of scale exist.
Answer Choices:
a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
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 compensation program, where management’s historical performance is 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, especially if fixed assets are lumpy and economies of scale exist.
Answer: b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
Question: Changes in a firm’s collection policy can affect sales, working capital, and profits.
Answer Choices:
a. True
b. False
Answer: a. True
Question: When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.
Answer Choices:
a. True
b. False
Answer: True
Question: The capital intensity ratio is generally defined as follows:
Answer Choices:
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 A0*/S0.
Answer: e. The amount of assets required per dollar of sales, or A0*/S0.
Question: Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm’s working capital needs.
Answer Choices:
a. True
b. False
Answer: b. False
Question: If a firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing.
Answer Choices:
a. True
b. False
Answer: True
Question: As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.
Answer Choices:
a. True
b. False
Answer: a. True
Question: If a firm buys on terms of 2/10, net 30, it should pay as early as possible during the discount period to lower its cost of trade credit.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.
Answer Choices:
a. True
b. False
Answer: a. True