Chapter 13 Dividend Policy and Internal Financing

61) Which of the following statements would NOT be a valid use of pro forma financial statements?

A) to determine a firm's needs for financing

B) to enhance a firm's ability to offer shareholders guaranteed operating results

C) to analyze the effects of a firm's forecasts on its financial performance

D) to serve as a benchmark when comparing actual results to planned activities

62) Which of the following is the initial and most important step in the preparation of pro forma financial statements?

A) Estimate the levels of investment in current and fixed assets.

B) Determine the rate of interest that will be required for borrowed funds.

C) Project the firm's sales revenues for the planning period.

D) Approximate the cost of raw materials.

63) The "percent of sales method" is a method of preparing pro forma financial statements. All of the following would be examples of how the "percent of sales method" is developed EXCEPT?

A) Forecast expenses by applying a percent of projected sales, using last year's expenses as a percent of last year's sales.

B) Forecast assets by applying a percent of projected sales, using current year's assets as a percent of current year's sales.

C) Approximate liabilities by applying a percent of projected sales, using the last five-year average of liabilities as a percent of sales.

D) Forecast retained earnings by applying a percent of projected sales, using current year's retained earnings as a percent of current year's sales.

64) Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts receivable. Make the following assumptions: current year's sales are $45,450,000; current year's cost of goods sold is $26,950,000; sales are expected to rise by 20%. The firm's investment in accounts receivable in the current year is $8,600,000. The firm's marginal tax rate is 35%. What is the projection for next year's accounts receivable?

A) $11,345,000

B) $10,320,000

C) $9,575,000

D) $8,772,000

65) Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's inventory. Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%. The firm's investment in inventory in the current year is $5,890,200. What is the projection for next year's inventory?

A) $7,657,260

B) $6,981,250

C) $5,845,500

D) $4,526,600

66) Discretionary financing needs will be lower if ________. Assume "all else equal."

A) the dividend payout ratio is raised

B) the firm's net profit margin increases

C) sales increase

D) fixed assets are currently at full capacity

67) Discretionary financing needs will be higher if ________. Assume "all else equal."

A) the firm's net profit margin increases

B) sales decline

C) the dividend payout ratio is raised

D) excess capacity exists for fixed assets

68) Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts payable. Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%. The firm's investment in accounts payable in the current year is $2,218,500. What is the projection for next year's accounts payable?

A) $2,127,000

B) $3,781,750

C) $2,884,050

D) $4,184,000

69) Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's cost of goods sold. Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%. What is the projection for next year's cost of goods sold?

A) $20,481,000

B) $21,138,900

C) $21,459,200

D) $22,786,400

70) Spontaneous sources of funds refers to all of the below EXCEPT

A) accruals.

B) a bank loan.

C) accounts payable.

D) common stock.