BMAL-590 BUSINESS FINANCE EXAM
REVIEW QUESTIONS WITH CORRECT
ANSWERS
Specifically, the sustainable growth model assumes the following: (1) The firm's only
form of equity is common stock (E), and it will not issue new shares of common stock
next year. (2) The firm's total asset turnover ratio, the ratio of sales divided by total
assets (S/A), remains constant. (3) The firm pays out a constant fraction, d, of its
earnings as dividends. (4) The firm maintains a constant assets-to-equity ratio (A/E). (5)
The firm's net profit margin, m, is constant.
Top-down sales forecasts - Answer-rely heavily on macroeconomic and industry
forecasts. Senior managers establish a firm-wide objective for increased sales;
individual divisions or business units receive targets that, in aggregate, collectively
achieve the firm's overall growth target; division heads pass down sales targets to
product line managers and other smaller-scale units.
The sales targets will vary across units within the division, but they must add up to
achieve the divisional goal.
Bottom-up sales forecasts - Answer-begin by assessing demand in the coming year on
a customer-by-customer basis. Managers add up these figures across sales territories,
product lines, and divisions to arrive at the overall sales forecast for the company. This
approach generally does not rely on mathematical and statistical models.
percentage-of-sales method - Answer-When firms construct pro forma statements by
assuming that all items grow in proportion to sales and by extending that percentage to
all income statement and balance sheet accounts, they are using the percentage-of-
sales method. This is a good starting point since such balance sheet items as
receivables, inventory, and payables do typically increase with sales, although not
always in a linear fashion.
external financing required (EFR) - Answer-calculated it follows: (Gross change in total
assets for the year - net cash generated from operations) / Total assets at the end of the
year.
sales target growth rates - Answer-Most firms establish growth as one of their long-term
objectives, and most firms, when planning for growth, focus on meeting sales target
growth rates. It is not unusual to observe a distinct upward trend in any company's
historical sales volume. However, in a single year many firms experience sharp quarter-
to-quarter sales changes due to seasonal factors.
,Construction-related businesses generate much higher volume in the summer than they
do in the winter. In contrast, toy companies experience peak volume in the winter.
Financing Strategies - Answer-Conservative Strategy
Aggressive Strategy
Matching Strategy
Conservative Strategy - Answer-Use more expensive long-term financing to finance
both permanent assets and temporary assets.
Aggressive Strategy - Answer-Use less expensive but riskier short-term debt to finance
both seasonal peaks and part of long-term growth in sales and assets.
Matching Strategy - Answer-Finance permanent assets with long-term funding sources
and temporary asset requirement with short-term financing.
cash budget - Answer-a detailed plan showing how cash resources will be acquired and
used over a specific time period
Firms use the cash budget to ensure they will have enough cash available to meet
short-term financial obligations. Any surplus cash resources can be invested quickly and
efficiently.
The cash budget also includes cash receipts, all the firm's cash inflows in a given
period. The most common components of cash receipts are cash sales, collections of
accounts receivable, and other cash receipts. The firm estimates collections of accounts
receivable using the past payment patterns of its customers.
Cash disbursements - Answer-Cash payments made by a business
include all outlays of cash by the firm in the period. The most common cash
disbursements are cash purchases, fixed asset outlays, payments of accounts payable,
wages, interest payments, taxes, and rent and lease payments.
Cash disbursements may also include items such as dividends and share repurchases.
It is important to remember that depreciation and other noncash expenses are not
included in the cash budget.
They are not outlays of cash and merely represent a scheduled write-off of an earlier
cash outflow. However, depreciation does have a cash flow effect through its impact on
tax payments.
The key input required to build a cash budget is - Answer-the firm's sales forecast
Which of the following is NOT a cash disbursement? - Answer-depreciation expenses
, Most pro forma statements begin with a sales forecast. One approach to deriving a
sales forecast is the top-down approach. Top-down sales forecasts rely heavily on
______ - Answer-macroeconomic and industry forecasts
A speedup in _____ will _____ a firm's financing needs; whereas, a slowdown in
______ will ______ a firm's financing needs. - Answer-payments; increase; collections;
increase
Most firms, when planning for growth, focus on ______ - Answer-meeting sales target
growth rates
Which of the following is not generally considered to be an advantage of term loans
over publicly issued bonds? - Answer-Liquidity, or how easily investors can trade them
in the secondary markets.
Which of the following are generally considered to be an advantage of term loans over
publicly issued bonds? - Answer-Lower flotation (issuance) costs.
Speed, or how long it takes to bring the issue to market.
Flexibility, or the ability to adjust the bond's terms after it has been issued.
Which of the following statements is false? - Answer-The term Eurobond specifically
applies to any foreign bonds denominated in U.S. currency.
Which of the following is NOT an example of a financial asset? - Answer-inventory
Which of the following is an example of a financial asset? - Answer-convertible bond
certificate of deposit
preferred stock
Which of the following is NOT a source of equity on a firm's balance sheet? - Answer-
property, plant, and equipment
Which of the following is a source of equity on a firm's balance sheet? - Answer-
additional paid-in capital
retained earnings
common stock
Which of the following statements is most correct? Other things held constant, _______
- Answer-the "liquidity preference theory" would generally lead to an upward sloping
yield curve.
Your uncle would like to restrict his interest rate risk and his default risk, but he still
would like to invest in corporate bonds. Which of the possible bonds listed below best
satisfies your uncle's criteria? - Answer-AAA bond with 5 years to maturity.
REVIEW QUESTIONS WITH CORRECT
ANSWERS
Specifically, the sustainable growth model assumes the following: (1) The firm's only
form of equity is common stock (E), and it will not issue new shares of common stock
next year. (2) The firm's total asset turnover ratio, the ratio of sales divided by total
assets (S/A), remains constant. (3) The firm pays out a constant fraction, d, of its
earnings as dividends. (4) The firm maintains a constant assets-to-equity ratio (A/E). (5)
The firm's net profit margin, m, is constant.
Top-down sales forecasts - Answer-rely heavily on macroeconomic and industry
forecasts. Senior managers establish a firm-wide objective for increased sales;
individual divisions or business units receive targets that, in aggregate, collectively
achieve the firm's overall growth target; division heads pass down sales targets to
product line managers and other smaller-scale units.
The sales targets will vary across units within the division, but they must add up to
achieve the divisional goal.
Bottom-up sales forecasts - Answer-begin by assessing demand in the coming year on
a customer-by-customer basis. Managers add up these figures across sales territories,
product lines, and divisions to arrive at the overall sales forecast for the company. This
approach generally does not rely on mathematical and statistical models.
percentage-of-sales method - Answer-When firms construct pro forma statements by
assuming that all items grow in proportion to sales and by extending that percentage to
all income statement and balance sheet accounts, they are using the percentage-of-
sales method. This is a good starting point since such balance sheet items as
receivables, inventory, and payables do typically increase with sales, although not
always in a linear fashion.
external financing required (EFR) - Answer-calculated it follows: (Gross change in total
assets for the year - net cash generated from operations) / Total assets at the end of the
year.
sales target growth rates - Answer-Most firms establish growth as one of their long-term
objectives, and most firms, when planning for growth, focus on meeting sales target
growth rates. It is not unusual to observe a distinct upward trend in any company's
historical sales volume. However, in a single year many firms experience sharp quarter-
to-quarter sales changes due to seasonal factors.
,Construction-related businesses generate much higher volume in the summer than they
do in the winter. In contrast, toy companies experience peak volume in the winter.
Financing Strategies - Answer-Conservative Strategy
Aggressive Strategy
Matching Strategy
Conservative Strategy - Answer-Use more expensive long-term financing to finance
both permanent assets and temporary assets.
Aggressive Strategy - Answer-Use less expensive but riskier short-term debt to finance
both seasonal peaks and part of long-term growth in sales and assets.
Matching Strategy - Answer-Finance permanent assets with long-term funding sources
and temporary asset requirement with short-term financing.
cash budget - Answer-a detailed plan showing how cash resources will be acquired and
used over a specific time period
Firms use the cash budget to ensure they will have enough cash available to meet
short-term financial obligations. Any surplus cash resources can be invested quickly and
efficiently.
The cash budget also includes cash receipts, all the firm's cash inflows in a given
period. The most common components of cash receipts are cash sales, collections of
accounts receivable, and other cash receipts. The firm estimates collections of accounts
receivable using the past payment patterns of its customers.
Cash disbursements - Answer-Cash payments made by a business
include all outlays of cash by the firm in the period. The most common cash
disbursements are cash purchases, fixed asset outlays, payments of accounts payable,
wages, interest payments, taxes, and rent and lease payments.
Cash disbursements may also include items such as dividends and share repurchases.
It is important to remember that depreciation and other noncash expenses are not
included in the cash budget.
They are not outlays of cash and merely represent a scheduled write-off of an earlier
cash outflow. However, depreciation does have a cash flow effect through its impact on
tax payments.
The key input required to build a cash budget is - Answer-the firm's sales forecast
Which of the following is NOT a cash disbursement? - Answer-depreciation expenses
, Most pro forma statements begin with a sales forecast. One approach to deriving a
sales forecast is the top-down approach. Top-down sales forecasts rely heavily on
______ - Answer-macroeconomic and industry forecasts
A speedup in _____ will _____ a firm's financing needs; whereas, a slowdown in
______ will ______ a firm's financing needs. - Answer-payments; increase; collections;
increase
Most firms, when planning for growth, focus on ______ - Answer-meeting sales target
growth rates
Which of the following is not generally considered to be an advantage of term loans
over publicly issued bonds? - Answer-Liquidity, or how easily investors can trade them
in the secondary markets.
Which of the following are generally considered to be an advantage of term loans over
publicly issued bonds? - Answer-Lower flotation (issuance) costs.
Speed, or how long it takes to bring the issue to market.
Flexibility, or the ability to adjust the bond's terms after it has been issued.
Which of the following statements is false? - Answer-The term Eurobond specifically
applies to any foreign bonds denominated in U.S. currency.
Which of the following is NOT an example of a financial asset? - Answer-inventory
Which of the following is an example of a financial asset? - Answer-convertible bond
certificate of deposit
preferred stock
Which of the following is NOT a source of equity on a firm's balance sheet? - Answer-
property, plant, and equipment
Which of the following is a source of equity on a firm's balance sheet? - Answer-
additional paid-in capital
retained earnings
common stock
Which of the following statements is most correct? Other things held constant, _______
- Answer-the "liquidity preference theory" would generally lead to an upward sloping
yield curve.
Your uncle would like to restrict his interest rate risk and his default risk, but he still
would like to invest in corporate bonds. Which of the possible bonds listed below best
satisfies your uncle's criteria? - Answer-AAA bond with 5 years to maturity.
