FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 17: Financial Planning and Control

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 21

True/False

Review LaterAdd Note

Review Later

One limitation of operating breakeven analysis is that variable cost must be assumed constant throughout the analysis in order to completely analyse changes in fixed investment.

A) True
B) False

Correct Answer

verified

Show Answer

Question 22

True/False

Review LaterAdd Note

Review Later

The higher the DOL, the greater the firm's use of debt and the more earnings will change following a change in sales.

A) True
B) False

Correct Answer

verified

Show Answer

Question 23

True/False

Review LaterAdd Note

The closer a firm is to its operating breakeven point, the greater is the absolute value of the degree of operating leverage.

Trident Food Corporation Trident Food Corporation generated the following statement of comprehensive income for the most recent fiscal year, which ended December 31, 2010: Each item of inventory Trident Foods produces has a selling price of R20. -Refer to Trident Food Corporation.What is the financial breakeven point for Trident Foods?

Other things held constant, if a firm is operating at a profit and then sales increase, the degree of operating leverage will decline.

Information on the Crum Company: -Refer to Crum Company.Crum expects sales to grow by 50% in 2010, and operating costs should increase at the same rate.Fixed assets were being operated at 40% of capacity in 2009, but all other assets were used to full capacity.Underutilised fixed assets cannot be sold.Current assets and spontaneous liabilities should increase at the same rate as sales during 2010.The company plans to finance any external funds needed as 35% notes payable and 65% ordinary shares.After taking financing feedbacks into account, and after the second pass, what is Crum's projected ROE using the projected statement of financial position method?

The purpose of financial breakeven analysis is to determine the level of sales a firm needs in order to cover the fixed and variable costs associated with producing and selling inventory items.

Operating costs include variable costs, depreciation, and interest charges.

The degree of operating leverage has which of the following characteristics?

Breakeven analysis can be used to determine how large sales of a new product must be for the firm to achieve profitability, but it is not useful in studying the effects of a general expansion in the firm's operations.

Alternative methods for producing a given product often have different degrees of operating leverage and hence have different breakeven points and degrees of risk.

Information on the Crum Company: -Hogan Inc.generated EBIT of R240,000 this past year using assets of R1,100,000.The interest rate on its existing long-term debt of R640,000 is 12.5 percent and the firm's tax rate is 40 percent.The firm paid a dividend of R1.27 on each of its 37,800 shares outstanding from net income of R96,000.The total book value of equity is R446,364 of which the ordinary shares account equals R335,000.The firm's shares sell for R28.00 per share in the market.The firm forecasts a 10% increase in sales, assets, and EBIT next year, and a dividend of R1.40 per share.If the firm needs additional capital funds, it will raise 60% with debt and 40% with equity.The cost of any new debt will be 13%.Spontaneous liabilities are estimated at R15,000 for next year, representing an increase of 10% over this year.Except for spontaneous liabilities, the firm uses no other sources of current liabilities and will continue this policy in the future.What will be the cumulative AFN Hogan will need to balance its projected statement of financial position using the projected statement of financial position method through the first two passes?

The projected statement of financial position method of forecasting is based on which of the following assumptions?

If a small change in sales results in a large change in EPS, then it must be caused by the financial leverage associated with the firm.

Errors in the sales forecast can be offset by similar errors in costs and income forecasts.Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

A firm whose degree of operating leverage (DOL) is equal to three means that a given percentage change in sales will change earnings per share by three times as much.

Financial planning involves implementing the financial plans, or forecasts, and dealing with the feedback and adjustment process that is necessary to ensure the goals of the firm are pursued appropriately.

When constructing pro forma financial statements, which of the following steps should be completed first?

Which of the following liabilities is most likely to increase spontaneously with an increase in sales?

Breakeven analysis can involve determining the magnitude of the firm's profit or losses at output levels on and around the point where revenues equal costs.