Chapter 6 Essentials

Question 1

Focus of chapter 6

Answer 1

Projecting financial growth

Question 2

How much a firm will generate in profits and how much financing the firm will require are projected on what

Answer 2

Pro Forma Financial Statements

Question 3

External Funding Required =

Answer 3

Assets - Liabilities - Equity

Question 4

Key variables in the pro forma income statements

Answer 4

Sales, COGS, Org. Costs, Depreciation expense, interest expense, taxes, dividends, change in RE

Question 5

Common assumptions about sales in pro forma income statements

Answer 5

Management forecast growth rate applied

Question 6

Common assumptions about COGS on pro forma income statement

Answer 6

Percentage of sales

Question 7

Common assumption about organizational costs on pro forma income statement

Answer 7

Percentage of sales

Question 8

Common assumption about depreciation expense on pro forma income statement

Answer 8

Percentage of fixed assets

Question 9

Common assumption about interest expense on the pro forma income statement

Answer 9

Interest rate applied to interest bearing debt

Question 10

Common assumption about taxes on the pro forma income statement

Answer 10

Tax rate applied to earnings before taxes

Question 11

Common assumption made about dividends on pro forma income statement

Answer 11

Policy or payout rate

Question 12

Common assumption about retained earnings made on the pro forma income statement

Answer 12

Pro forma net earnings les dividends

Question 13

Calculating gross profit on a pro forma income statement =

Answer 13

Pro forma sales x gross margin percentage

Question 14

For the pro forma income statement either COGS is given or it =

Answer 14

Beg. Inventory + Purchases - End Inventory

Question 15

The typical expenses included on the pro forma income statement are

Answer 15

• selling, general, and admin
• depreciation expense

Question 16

Key Variables on the Pro Forma Balance Sheet

Answer 16

Cash, AR, Inventory, Fixed Assets, Total Assets, Total Liabilities, Equity, Total Liabilities and Equity, AP, Long-Term Debt

Question 17

Assumption made about cash on the pro forma balance sheet

Answer 17

Minimum balance required

Question 18

Common assumption made about AR on the pro forma balance sheet

Answer 18

Collection period

Question 19

Common assumption made about inventory on the pro forma balance sheet

Answer 19

Inventory period

Question 20

Common assumption made about fixed assets on the pro forma balance sheet

Answer 20

Management forecast of new assets accounting for depreciation or as a fixed asset turnover ratio

Question 21

Common assumption made about AP on the pro forma balance sheet

Answer 21

Payables period

Question 22

Common assumption made about long-term debt on the pro forma balance sheet

Answer 22

Total liabilities less AP

Question 23

AR is often given or found based on

Answer 23

Age of AR / Average Daily Sales

Question 24

Ending fixed assets in the pro forma balance sheet =

Answer 24

Beg. Fixed assets + new fixed asset - depreciation

Question 25

Total assets on the pro forma balance sheet is generated by

Answer 25

Cash + AR + Inventory + Fixed Assets

Question 26

Pro forma equity on the pro forma balance sheet is generated by

Answer 26

Beg equity + NE - dividend payments

Question 27

Pro forma accounts payable on the balance sheet is calculated by

Answer 27

Accounts payable / average daily purchases

Question 28

An alternative and equivalent method of projecting future financial needs is to create this direct cash flow forecasting method often based on monthly cash flows

Answer 28

Prom Forma Cash Budget

Question 29

Involves changing one variable in the pro forma statements to answer “what if?” Questions such as “what if sales were 10% lower than projected?

Answer 29

Sensitivity Analysis

Question 30

Is similar to sensitivity analysis but involves changing several variables at one time

Answer 30

Scenario Analysis

Question 31

Performing sensitivity rate is important because these three variables are critical to daily operations and success

Answer 31

Sales, Interest, Working Capital

Question 32

The maximum rate at which revenues can grow without negatively impacting a firm’s financial resources

Answer 32

Sustainable Growth Rate

Question 33

Sustainable Growth Rate Formula

Answer 33

Return on Equity X Retention Ratio

Question 34

The fraction of net earnings available to common shareholders not paid out dividends and is also equal to 1 - the dividend payout ratio

Answer 34

Retention Ratio

Question 35

If a firms is growing above its sustainable growth rate it must what?

Answer 35

Improve profit margin or generate more revenue

Question 36

Pro forma statements answer 3 questions

Answer 36

1 how profitable do we expect to be
2 what is the anticipated financing amt
3 what is the right amount of sale growth