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1. The term “spontaneously generated funds” generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

a. True

b. False

2. The most critical step in constructing a set of pro forma financial statements is the sales forecast.

a. True

b. False

3. If your sales this year were $37,250,000 and you were forecasting 17 percent growth for next year, then your next year’s sales would be $54,250,000.

a. True

b. False

4. If ratios computed on forecasted “pro forma” financial statements are out of acceptable tolerances, it is an indication that the forecast is faulty and must be redone.

a. True

b. False

5. Consider the following financial data:

Year Sales
2005 $3,892
2006 3,904
2007 6,094
2008 6,337
2009 5,075

The company’s average annual sales growth rate from 2005 through 2009 was:

a. 10.1%

b. 30.4%

c. 6.9%

d. 5.5%

6. Assume that your firm wants its Inventory Turnover ratio next year to be 7x. Cost of goods Sold is forecasted to be $6,992. What will the forecasted inventory balance have to be to achieve a Turnover ratio of 7x?

a. $999

b. $6,985

c. $48,944

d. Can’t tell without further information

7. Kenney Corporation recently reported the following income statement for 2009 (numbers are in millions of dollars):
2010
Sales $7,000 x 1.10 = $7,700
Total operating costs 3,000 x 1.10 = 3,300
EBIT 4,000 4,400
Interest 200 200
Earnings before tax (EBT) 3,800 4,200
Taxes (40%) 1,520 1,680
Net income $2,280 $2,520
Dividends (50%) 1,260
Addition to retained earnings $1,260

The company forecasts that its sales will increase by 10 percent in 2010 and its operating costs will increase in proportion to sales. The company’s interest expense is expected to remain at $200 million, and the tax rate will remain at 40 percent. The company plans to pay out 50 percent of its net income as dividends, the other 50 percent will be additions to retained earnings. What is the forecasted addition to retained earnings for 2010?

a. $1,140

b. $1,260

c. $1,440

d. $1,790

e. $1,810

8. If you constructed a set of pro forma financial statements for 2010 and found that projected Total Assets exceeded projected Total Liabilities and Equity by $11,250, you would know that:

a. your forecasting method is inaccurate

b. your forecasting assumptions or calculations must be in error, because projected Assets
and projected Liabilities and Equity must always balance

c. you must arrange for $11,250 in additional financing

d. your firm will have $11,250 of excess funds available in 2010

9. Consider the following condensed Income Statement:

2009 2010

Sales $8,000,000 x 1.15 = $9,200,000
COGS 6,500,000 x 1.15 = 7,475,000
Gross Profit 1,500,000 $1,725,000

Sales growth in 2010 is expected to be 15%

If COGS is assumed to vary directly with sales, then Gross Profit for 2010 will be:

a. $7,475,000

b. $1,725,000

c. $1,200,000

d. $1,500,000

10. Jill’s Wigs Inc. had the following balance sheet last year:
Forecast this year
Cash $ 800 x 2 = $1,600
Accounts receivable 450 x 2 = 900
Inventory 950 x 2 = 1,900
Net fixed assets 34,000 34,000
Total assets $36,200 $38,400

Accounts payable $ 350 x 2 = $ 700
Accrued wages 150 x 2 = 300
Notes payable 2,000 2,000
Mortgage 26,500 26,500
Common stock 3,200 3,200
Retained earnings 4,000 + $1,000 = 5,000
Total liabilities & equity $36,200 $37,700

AFN = $38,400 – $37,700 = $700

Jill has just invented a non-slip wig for men which she expects will cause sales to double from $10,000 to $20,000, increasing net income to $1,000. On Jill’s balance sheet the cash, accounts receivable, and inventory accounts, and the accounts payable and accrued wages accounts all vary directly with sales (that is, when sales changes these accounts change by the same percentage). Jill also feels that she can handle the increase in sales without adding any fixed assets. (1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?

a. No; zero

b. Yes; $7,700

c. Yes; $1,700

d. Yes; $700

e. No; there will be a $700 surplus.

 

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