Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook
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280 QUESTIONS AND PROBLEMS
markets) in which they both operate. Only through having
some type of advantage can a firm ______________ in
something and get ______________ back in ______________.
3. A(n) ______________ of gaining a competitive or compar-
ative advantage is consistent with ______________ share-
holder wealth. This is because projects with
______________ value arise when the firm has a competi-
tive or comparative advantage over other firms. A strategy
is the direction a firm takes to meet its ______________.
A(n) ______________ plan is how a firm intends to go in
that direction. In ______________ management, a strategic
investment plan includes policies to seek out possible
investment ______________.
4. ______________ forecasts are an important part of finan-
cial planning. ______________ forecasts can result in
shortages of ______________, inadequate short-term
______________ arrangements, and so on. If a firm’s sales
forecast ______________ its mark, either ______________
or ______________ sales, there are many potential
______________.
5. To predict ______________ flows, we must forecast sales
that are uncertain because they are affected by future
______________, ______________, and ______________
conditions. Nevertheless, we can usually assign meaning-
ful degrees of ______________ to our forecasts. We fore-
cast ______________ in one of the following ways:
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Strategy and Financial Planning 281
______________ analysis; ______________ surveys; and
______________ of management.
6. The experience of a firm’s management and their
______________ with the firm’s ______________,
______________, and ______________ make them reliable
forecasters of ______________ sales. The firm’s own man-
agers should have the ______________ to predict the mar-
ket for the goods and services and to ______________ the
costs of producing and marketing them. But there are poten-
tial ______________ in using management forecasts. These
forecasts may ______________ the firm to ______________
more resources, such as a larger capital budget and addi-
tional personnel, to that manager.
7. ______________ is an important element in planning for
both the ______________-term and the ______________-
term. But forecasts are made by ______________. Fore-
casters tend to be ______________, which usually results
in ______________ than deserved forecasts of
______________ sales. In addition, people tend to focus on
what worked in the ______________, so past successes
carry more ______________ in the developing forecasts
than an analysis of the future. One way to avoid this is to
make managers ______________ for their forecasts,
______________ accurate forecasts and ______________
those that are way off the mark.
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282 QUESTIONS AND PROBLEMS
8. In ______________, we bring together analyses of
______________ flows, projected ______________ state-
ments, and projected ______________ sheets. The
______________ flow analyses are ______________ impor-
tant although generation of the ______________ statement
and ______________ sheet is needed. Most firms extend or
receive ______________, so cash flows and net income do
not ______________.
9. A(n) ______________ balance sheet is a(n) ______________
balance sheet for a(n) ______________ period that sum-
marizes assets, liabilities, and equity. A pro forma
______________ statement is the projected ______________
statement for a future period that summarizes
______________ and ______________. Together, both
projections help identify a firm’s ______________ and
______________ needs.
10.The ______________ of accounts method starts with the
______________ budget. Before putting together the
______________ income statement and balance sheet, we need
to see how the various ______________, ______________, and
______________ accounts change from month to month,
based on the information provided in the cash budget.
The ______________ method uses historical relationships
between ______________ and each of the other
______________ statement accounts and between
______________ and each of the ______________ sheet
accounts.
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Strategy and Financial Planning 283
SHORT ANSWER QUESTIONS
Refer to Chapter 29, pages 933–967 in Financial Manage-
ment and Analysis.
1. Why is financial planning important?
2. What is the purpose of the budgeting process?
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284 QUESTIONS AND PROBLEMS
3. Explain forecasting with regression analysis.
4. How can the analysis of cash flows evaluate the perfor-
mance of a firm?
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Strategy and Financial Planning 285
5. What are the techniques used for cash flow analysis and
forecasting?
PROBLEMS
Refer to Chapter 29, pages 933–967 in Financial Manage-
ment and Analysis.
1. The financial manager of DoReMi Company has prepared
the following pro forma balance sheet for next month:
After preparing this budget, the financial manager knows
that DoReMi must maintain a current ratio of 4 and a
debt-to-equity ratio less than 2 at all times. How might
the accounts be adjusted so that these ratios are achieved
in the quickest and most correct manner? Propose an
Assets Liabilities and Equities
Cash $500 Accounts payable $525
Accounts receivable 300 Long-term debt 575
Inventory 300 Common equity 400
Plant and equipment 400 Total liabilities and equity $1,500
Total assets $1,500
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286 QUESTIONS AND PROBLEMS
alternative pro forma balance sheet that satisfies this con-
straint. How does the adjustment alter DoReMi’s risk?
2. Consider the Tomato Company’s sales for the peak sum-
mer months:
Eighty percent of Tomato’s sales are for credit. Eighty
percent of all credit sales are paid the following month
and the remainder are paid two months after the sale.
Estimate Tomato’s cash flow from these sales.
July $12,000
August $20,000
September $15,000
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Strategy and Financial Planning 287
3. Suppose a firm had the following assets at the end of 2000:
If the firm had sales of $1 million, use the percentage of
sales method with 2000 as the base year. What are the
predicted current assets and plant assets for the firm for
2001, if sales are forecasted to be $1,400,000?
Current assets $200,000
Plant assets $500,000
Total assets $700,000
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PART
Two
Solutions
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