FIN 420 EXAM 3 ADVANCED PORTFOLIO
THEORY ASSET ALLOCATION AND
PERFORMANCE EVALUATION PRACTICE
EXAM SET
●● The key ingredient in a firm's financial planning is an accurate sales
forecast.
Answer: True
●● A corporation that increases it net profit margin will need less
discretionary financing, other things being equal.
Answer: True
●● Issuing new short-term bonds to finance an expansion is an example
of spontaneous financing.
Answer: False
●● Discretionary financing accounts include all of the following
EXCEPT
long-term debt.
notes payable.
accrued liabilities.
common stock.
,Answer: accrued liabilities
●● The percent of sales method can be used to forecast:
expenses
assets
liabilities
all of the above
Answer: all of the above
●● Using the percentage of sales method, forecasted retained earnings
balance is equal to
-prior year retained earnings plus projected net income less projected
dividends.
-the ratio of retained earnings to sales for the current year multiplied by
projected sales for next year.
-the retained earnings balance for the current year as no changes are
made to this financing account when using the percent of sales method.
-the ratio of retained earnings to sales for the current year multiplied by
projected sales for next year, minus dividends paid.
Answer: prior year retained earnings plus projected net income less
projected dividends.
●● Fixed assets are often estimated incorrectly by the percent of sales
method because
, -fixed assets remain constant and the percent of sales method assumes
all assets increase proportionally with sales.
-fixed asset are very expensive.
-fixed assets are typically purchased in "lumps" and therefore do not
increase proportionally with sales.
-fixed assets are part of the capital budgeting process.
Answer: fixed assets are typically purchased in "lumps" and therefore do
not increase proportionally with sales.
●● Potential sources of financing to support an increase in sales include
all of the following EXCEPT
increase in the dividend payout ratio.
increase in spontaneous liabilities.
increase in accounts payable.
issuance of bonds and/or common stock
Answer: increase in the dividend payout ratio
●● The percent of sales method does not provide a reasonable prediction
of asset levels for instances when there are economies of scale in the use
of the asset being forecast and when asset purchases are lumpy. True or
False
Answer: True
, ●● True or False: Financial forecasting is the process of attempting to
estimate a firm's future financing requirements.
Answer: True
●● If a company determined they had a financing deficit, the firm could
remedy the situation by
borrowing on its line of credit
paying a special dividend
pay back long term debt
decreasing the retention ratio
increasing inventory
Answer: borrowing on its line of credit
●● What would the firm's projected retained earnings balance be given
the following projected income statement and dividends payout?
Answer: 404
●● The following financial data is reported in millions. Assuming
spontaneous liabilities increase by $11 million, what is the AFN
(assuming the company doesn't issue any new stock or sell new bonds)?
Hint: AFN = Projected Increase in Operating Assets - Increase in Op
Liabilities - Retained Earnings
THEORY ASSET ALLOCATION AND
PERFORMANCE EVALUATION PRACTICE
EXAM SET
●● The key ingredient in a firm's financial planning is an accurate sales
forecast.
Answer: True
●● A corporation that increases it net profit margin will need less
discretionary financing, other things being equal.
Answer: True
●● Issuing new short-term bonds to finance an expansion is an example
of spontaneous financing.
Answer: False
●● Discretionary financing accounts include all of the following
EXCEPT
long-term debt.
notes payable.
accrued liabilities.
common stock.
,Answer: accrued liabilities
●● The percent of sales method can be used to forecast:
expenses
assets
liabilities
all of the above
Answer: all of the above
●● Using the percentage of sales method, forecasted retained earnings
balance is equal to
-prior year retained earnings plus projected net income less projected
dividends.
-the ratio of retained earnings to sales for the current year multiplied by
projected sales for next year.
-the retained earnings balance for the current year as no changes are
made to this financing account when using the percent of sales method.
-the ratio of retained earnings to sales for the current year multiplied by
projected sales for next year, minus dividends paid.
Answer: prior year retained earnings plus projected net income less
projected dividends.
●● Fixed assets are often estimated incorrectly by the percent of sales
method because
, -fixed assets remain constant and the percent of sales method assumes
all assets increase proportionally with sales.
-fixed asset are very expensive.
-fixed assets are typically purchased in "lumps" and therefore do not
increase proportionally with sales.
-fixed assets are part of the capital budgeting process.
Answer: fixed assets are typically purchased in "lumps" and therefore do
not increase proportionally with sales.
●● Potential sources of financing to support an increase in sales include
all of the following EXCEPT
increase in the dividend payout ratio.
increase in spontaneous liabilities.
increase in accounts payable.
issuance of bonds and/or common stock
Answer: increase in the dividend payout ratio
●● The percent of sales method does not provide a reasonable prediction
of asset levels for instances when there are economies of scale in the use
of the asset being forecast and when asset purchases are lumpy. True or
False
Answer: True
, ●● True or False: Financial forecasting is the process of attempting to
estimate a firm's future financing requirements.
Answer: True
●● If a company determined they had a financing deficit, the firm could
remedy the situation by
borrowing on its line of credit
paying a special dividend
pay back long term debt
decreasing the retention ratio
increasing inventory
Answer: borrowing on its line of credit
●● What would the firm's projected retained earnings balance be given
the following projected income statement and dividends payout?
Answer: 404
●● The following financial data is reported in millions. Assuming
spontaneous liabilities increase by $11 million, what is the AFN
(assuming the company doesn't issue any new stock or sell new bonds)?
Hint: AFN = Projected Increase in Operating Assets - Increase in Op
Liabilities - Retained Earnings
