Unit 5

Question 1

a plan for controlling cash inflows and outflows business to balance income with expenditures.

Answer 1

Cash budgets

Question 2

For cash sales, the business receives cash at the time sales are made to customers.

Answer 2

Cash Receipts

Question 3

suppliers who sell you raw materials that you can use to produce items to sell or to provide services.

Answer 3

Cash Disbursements

Question 4

the projection of future earnings after all the projected costs are subtracted from the projected sales.

Answer 4

Profit forecasting-

Question 5

using sales growth and profit forecast to construct a pro forma balance sheet to understand the future implications of the sources and uses of finances.

Answer 5

Balance sheet forecasting

Question 6

a financial statement the projects an estimate for future periods “as if” sales grew as predicted.

Answer 6

Pro forma statements-

Question 7

it is the sum (or net) of the present values of all of the project’s expected cash inflows and outflows.

Answer 7

NPV

Question 8

the rate of return that a firm earns on its capital projects.

Answer 8

Internal Rate of Return (IRR)-

Question 9

the required rate of return that a company expects to earn in order to consider a project.

Answer 9

Hurdle rate

Question 10

when a limited amount of funds is available.

Answer 10

Capital constrained environment

Question 11

when two or more events do not coincide.

Answer 11

Mutually exclusive-

Question 12

the ratio of payoff to investment for proposed project.

Answer 12

Profitability index (PI)-

Question 13

Another name for discretionary financing needed or external financing needed. It represents the additional financing needed given a firm’s expectations for future growth.

Answer 13

Additional Funds Needed (AFN)

Question 14

When a limited amount of funds are available.

Answer 14

Capital-constrained Environment

Question 15

Accounts that do not vary automatically with sales but are left to the discretion of management.

Answer 15

Discretionary Accounts

Question 16

The additional financing needed given a firm’s expectations for future growth.

Answer 16

Discretionary Financing Needed (DFN)

Question 17

Another name for the discretionary financing needed or additional funds needed. It represents that additional financing needed given a firm’s expectations for future growth.

Answer 17

External Financing Needed (EFN)

Question 18

Accounts that vary naturally with sales

Answer 18

Spontaneous Accounts

Question 19

The level of growth where four key financial ratios- profitability, asset utilization, leverage, and payout - are constant and where the firm does need to issue any new equity to fund the growth.

Answer 19

Steady State Growth

Question 20

The growth rate that allows a firm to maintain its presents financial ratios without issuing new equity

Answer 20

Sustainable Growth Rate (SGR)

Question 21

An expense that you do not have direct control over and that remains constant from period to period.

Answer 21

Fixed Expenditures

Question 22

An expense that you have direct control over and that can change from period to period

Answer 22

Variable Expenditures

Question 23

• is easy to interpret,
• considers time value of money, and
• does not require use of required rate of return.

Answer 23

Advantages of IRR

Question 24

1. is not a good indicator of the amount of value created,
2. ignores mutually exclusive projects,
3. cannot be used to compare projects with different durations, and
4. requires conventional cash flows.

Answer 24

Disadvantages of IRR

Question 25

o Requires calculation of appropriate cost of capital
o Is not useful to compare projects of varying sizes
o no sense of return.

Answer 25

Disadvantage of NPV

Question 26

o Considers time value of money
o Calculates value added to the firm
o Considers risk and required return

Answer 26

Advantages to NPV

Question 27

1. Considers the time value of money
2. Takes into account the risk of future cash flows through the cost of capital
3. Includes all future cash flows
4. Indicates whether an investment will create value for the company

Answer 27

Advantages of PI

Question 28

1. requires calculation of cost of capital and
2. is not useful for mutually exclusive projects.

Answer 28

Disadvantages of PI

Question 29

1. requires calculation of cost of capital and
2. is not useful for mutually exclusive projects.

Answer 29

Disadvantages of PI

Question 30

1. Project sales revenues and expenses
2. Forecast change in spontaneous balance sheet accounts
3. Deal with discretionary accounts
4. Estimate fixed asset account
5. Calculate retained earnings (RE)
6. Determine total financing need (projected total assets)
7. Calculate DFN

Answer 30

The Percent of Sales Method