Ch19. Financial Planning and Analysis

Question 1

1. What are the three categories of costs (and examples of each) that must be considered in product planning,
   capital budgeting, cost/benefit analysis, and financial plan development?

Answer 1

• Fixed, Costs that do not vary over a wide range of activity
• Variable, costs that change in direct proportions with business activity
• semi variables (mixed), stair step changes

Question 2

What are the differences between operating leverage and financial leverage?

Answer 2

• costs associated with operating and costs associated with financing

Question 3

What is a break-even analysis, and how is it used in a cost/benefit analysis?

Answer 3

• level of activity for an operation in which the cost equal the benefits

Question 4

How is sensitivity analysis used in investment risk analysis?

Answer 4

• shows how the final outcome it influenced by changing the value of a particular variable.

Question 5

What are the three main methods of assessing investment risk?

Answer 5

• Sensitivity Analysis
• Scenario Analysis - What If
• Simulation

Question 6

What is the cash conversion efficiency ratio, and how is it used?

Answer 6

• How effectively a company has converted sales into cash.

Cash / Sales

Question 7

Compare and contrast the times interest earned (TIE) ratio and the fixed-charge coverage ratio.

Answer 7

• Operating income /Int Exp minus EBIT/Int Exp

- Measures the ability of a firm to service debt through interest payments.

Question 8

How are performance ratios (e.g., gross profit margin and operating profit margin) utilized in evaluating
a firm’s performance?

Answer 8

• Shows how profit is measured up against Revenue or other level of fiancing

Question 9

What is integrated ratio analysis?

Answer 9

• using two ratios for analysis in a different look.

Question 10

What makes service industry ratios different from typical manufacturing firm ratios?

Answer 10

• they turnover much more frequently

Question 11

What are the primary advantages and disadvantages of ratio analysis?

Answer 11

Advantages - easily computed and widely used. info for calculations are easy to obtain. Easy to compare between to companies

Disadvantages - historical info vs intra. Do not reflect economic value. Info derived from different accounting methods when comparing different companies

Question 12

Compare and contrast return on investment (ROI) and residual income (RI) as measures of performance.

Answer 12

• ROI is a rate and RI is a profit or loss figure

Question 13

What is the economic value added (EVA) concept?

Answer 13

• value is created only if the firm earns a rate of return that exceeds its cost of capital

Question 14

What are the two chief components of the master budget?

Answer 14

1. Operating Budget

2. Financial Budget

Question 15

What is RAROC?

Answer 15

Risk- Adjusted Return on Capital

Measures the return on a project based upon the overall risk of the project.