420 Forecasting + Valuation Practice Problems Questions and Answers

420 Forecasting + Valuation Practice Problems Questions and Answers Which type of financial statement analysis is most commonly used to create a baseline estimate for a financial forecast? Common-size analysis Damon estimates his beginning cash balance for June to be $10,000, with cash inflows of $4,000 and cash outflows of $6,000 for the month. Which of the following is true? Damon has a cash deficit of $2,000 that reduces his beginning cash balance. Debtors create projections of a firm's financials in order to evaluate its ability to repay its loans. True Phi Co. projects sales of $1,535,000 for the year, which will entirely be on account. If its accounts receivable turnover ratio is 10 times, how much would it project to have in accounts receivable at the end of the year? $153,500 A common-size analysis of a company's historical balance sheets shows that its accrued expenses are generally 15 percent of total assets. It projects total assets of $3,600,000 for the year. What should it show on its projected balance sheet for accrued expenses? $540,000 The percent of sales method can be used to forecast: expenses assets liabilities all of the above A company has the following sales and gross profit margin projections for the next three months. What is its projected cost of goods sold for the month of May? $36,568 A company has the following sales projections for the next three months. Historically it collects 75 percent of its sales in the month when the sale is made and 25 percent in the month after. How much are its cash collections in the month of May? $62,725 A company is projecting sales of $1,535,000 for the year. It projects that its variable expense rate for the year will be 63 percent. How much in variable expenses will it incur for the year? $967,050 A company projects cash from operations at $1,300,000 for the year while its cash for investing activities will amount to $1,850,000 because of a large capital investment project. How much cash will it have to borrow from outside sources or raise from selling common stock for the year? $550,000 Lulu's firm's sales grew by 9%, 11%, and 10% over the past three years, respectively. Lulu wants to take her first pass at forecasting sales for next year. What percent sales growth should she use? A growth percent of 10% because it’s the average of the past three years. If Lulu prefers to be more conservative in her forecast, she might choose only 9%. If Lulu prefers to be more aggressive in her forecast, she might choose 11%. All of the above are correct. A company is preparing its sales projections for 2022 and has decided that a reasonable sales target is $1,200,000 for the year. Its sales are seasonal, and in the past, it has recorded sales in each quarter as follows: first quarter 12 percent, second quarter 20 percent, third quarter 28 percent, and fourth quarter 40 percent. Given these assumptions, what is the sales/revenue forecast for the 1st quarter? $144,000 In the cash forecast, if cash inflows exceed cash outflows, what does this create? A cash surplus Jamal wants to forecast sales for the first quarter of next year. His first assumption is that sales will likely grow by 3% in the coming year. If Jamal's monthly sales were $10,000, $9,000, and $11,000 in the first quarter of this year, what should his sales forecast be for the first quarter of next year? $30,900 Financial forecasting includes attempting to estimate a firm's future financing requirements. True When forecasting the ending balance for retained earnings, what information might you use? The previous period's retained earnings Forecasted earnings from the income statement Any forecasted dividends that will be paid out All of the above A company projects sales of $1,520,000 for the year, expects a gross margin of 42 percent, and has a variable expense rate of 12 percent and a fixed expense of $153,000. How much is its projected net income for the year? $303,000 Javier's firm has created a forecasted income statement that shows the firm with a net profit of $25,000 for the coming year. What can we assume about Javier's cash flows? Without assessing all forecasted financial statements and creating a cash forecast, we don't know what Javier's ending cash balance will be. In the context of a firm’s financial statements, what does pro forma mean? Forward looking A company projects sales of $1,535,000 for the year, which will entirely be on account. If its accounts receivable turnover ratio is 10 times, how much would it project to have in accounts receivable at the end of the year? $153,500 A company has a projected balance sheet showing assets of $750,000 at the end of the year. It has an objective of realizing return on assets of 12 percent. How much in net income should it target for the year in projecting its income statement? $90,000 A company has the following sales and gross profit margin projections for the next three months. What is its projected gross profit in dollars for the month of May? $28,732 A projected income statement on an accrual basis will provide limited information on the firm's ability to generate cash. True When completing a first pass at a forecasted income statement, which type of costs are assumed to be tied directly to sales? Variable costs A company is preparing its sales projections for 2022 and has decided that a reasonable sales target is $1,200,000 for the year. Its sales are seasonal, and in the past, it has recorded sales in each quarter as follows: first quarter 12 percent, second quarter 20 percent, third quarter 28 percent, and fourth quarter 40 percent. Given these assumptions, what is the sales/revenue forecast for the 2nd quarter? $240,000 An analyst calculated the current year's FCFs for a firm to be $150,000 and forecasts that the FCFs will grow at 4% each year. They also determined an appropriate discount rate of 12%. What is the value of the firm? 1,950,000 What key element of the income statement is used to estimate several other key income statement lines? Sales The first step in forecasting a business's financials is to: Estimate projected revenues for the next period. A company has the following sales projections for the next three months. Historically it collects 75 percent of its sales in the month when the sale is made and 25 percent in the month after. What is the balance in its accounts receivable at the end of May? $16,325 Financial forecasting includes all of the following except: Maintaining the target capital structure of the firm by estimating spontaneous financing.