CH 1-4: Week 1

Question 1

Assets = Liabilities + Stockholder Equity

Answer 1

Balance Sheet Identity

Question 2

What is an LLC Corporation?

Answer 2

• Limited Liability Corporation
  
  • Unlimited lifespan
  • Separation of ownership and management
  • Transfer of ownership is easy
  • Easier to raise capital

Question 3

What are the three major types of Business Organizations in the United States?

Answer 3

1. Sole Proprietorship
2. Partnership (General or Limited)
3. Corporation (Limited Liability Company)

Question 4

What is determined by
net working capital decisions?

Answer 4

Liquidity requirements

Question 5

What is determined by
capital structure decisions​?

Answer 5

Degree of financial leverage

Question 6

What is determined by
dividend policy decisions?

Answer 6

Cash paid to shareholders

Question 7

What is determined by
capital budgeting decisions​?

Answer 7

Investment in new assets

Question 8

What does Financial Leverage tell you?

Answer 8

Level of risk in the company.

Question 9

(IGR) Internal Growth Rate tells us

Answer 9

How much the firm can grow assets using retained earnings as the only source of financing (growing organically).

Question 10

(IGR) Internal Growth Rate assumes

Answer 10

The dividend payout ratio is constant and no liabilities vary with sales.

Question 11

(SGR) Sustainable Growth Rate

Answer 11

How much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt-equity ratio.

Question 12

What are the four major areas of concern the sustainable growth rate illustrates for a firm?

Answer 12

1. operating efficiency (measured by profit margin)
2. asset use efficiency (measured by total asset turnover)
3. dividend policy (measured by the retention ratio)
4. financial policy (measured by debt-equity ratio)

Question 13

What are the roles of Financial Planning?

Answer 13

1. Examine interactions; help management see the interactions between decisions
2. Explore options; give management a systematic framework for exploring its opportunities
3. Avoid surprises; help management identify possible outcomes and plan accordingly
4. Ensure feasibility and internal consistency; help management determine if goals can be accomplished and if the various stated (and unstated) goals of the firm are consistent with one another

Question 14

How does Financial planning ensure feasibility and internal consistency for a firm?

Answer 14

Help management determine if goals can be accomplished and if the various stated (and unstated) goals of the firm are consistent with one another.

Question 15

Sales Forecast

Answer 15

Many cash flows depend directly on the level of sales (often estimated using sales growth rate, or acquired from external parties)

Question 16

Pro forma Statements

Answer 16

Setting up the plan using projected financial statements allows for consistency and ease of interpretation

(forecast on balance sheet, income statement, and statement of cash flows)

Question 17

Asset Requirements

Answer 17

The additional assets that will be required to meet sales projections

Question 18

Financial Requirements

Answer 18

The amount of financing needed to pay for the required assets.

Question 19

Plug Variable or Balancing Item

Answer 19

Determined by management deciding what type of financing will be used to make the balance sheet balance

Question 20

Economic Assumptions

Answer 20

Explicit assumptions about the coming economic environment

Question 21

Percentages of Sales

Answer 21

Some items vary directly with sales, while others do not vary with sales.