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Financial planning

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Objective: Describe the relationship between strategic planning and financial planning.

5. Which of the following statements is true?
a. The future value of an annuity would be greater if funds are invested at the beginning of each period instead of at the end of each period.
b. An annuity is a series of equal payments that are made, or received, forever.
c. The effective annual rate (APR) of a loan is higher the less frequently payments are made.
d. The future value of an annuity would be greater if funds are invested at the end of each period rather than at the beginning of each period.

Objective: Prepare a cash budget.

6. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
a. $25,000
b. $15,000
c. $35,000
d. None of the above

Objective: Perform a break-even analysis.

7. Potential applications of the break-even model include:
a. replacement for time-adjusted capital budgeting techniques.
b. pricing policy.
c. optimizing the cash-marketable securities position of a firm.
d. none of these

Objective: Calculate present value and future value of cash flows.

8. If you invest $750 every six months at 8% compounded semi-annually, how much would you accumulate at the end of 10 years?
a. $10,065
b $10,193
c. $22,334
d. $21,731

Week Three: Working Capital Management and Capital Budgeting

Objective: Evaluate effective working capital management techniques.

9. According to the hedging principle, permanent assets should be financed with _______ liabilities.
a. permanent
b. spontaneous
c. current
d. fixed

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A. Produce a set of financial statements for 2007. Assume that net working capital will equal 50 percent of fixed assets.
b. Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2007. What is the projected debt ratio for 2007?

16. Building Financial Models. The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (that is, assets net of depreciation) by $200,000 per year for the next 5 years and forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10 percent of net fixed assets at the end of the year. Fixed costs are expected to remain at $56,000 and variable costs at 80 percent of revenue. The company's policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 25 percent of total capital.

INCOME STATEMENT, 2006
(figures in thousands of dollars)

Revenue $1,800
Fixed costs 56
Variable costs (80% of revenue) 1,440
Depreciation 80
Interest (8% of beginning-of-year debt) 24
Taxable income 200
Taxes (at 40%) 80
Net income $120
Dividends $80
Retained earnings $40

BALANCE SHEET,YEAR-END
(figures in thousands of dollars)
2006
Assets
Net working capital $400
Fixed assets 800
Total assets $1,200
Liabilities and shareholders' equity
Debt $300
Equity 900
Total liabilities and
shareholders' equity $1,200

a. Produce a set of financial statements for 2007. Assume that net working capital will equal 50 percent of fixed assets.
b. Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2007. What is the projected debt ratio for 2007?

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