FN1 Module 9 Past Exam Questions Handout #2
Question 1.
An important step in the preparation of pro forma financial statements is anticipation of
future strategic choices. Which of the following is not a strategic choice that needs to be
considered in the preparation of pro forma financial statements?
1)
2)
3)
4)
Sales forecasts
Dividend payments and other financial servicing charges
Future investment opportunities
Capital structure changes
Question 2.
Which of the following is the accurate statement about cash planning?
1) The moderately conservative approach places some reliance on long -term
debt by financing the permanent portion of net working capital plus some of the
seasonal net working capital with long -term debt.
2) The difference between a company’s spontaneous current liabilities required at
the seasonal low of a business cycle and that required at the peak level is called the
spontaneous permanent liabilities.
3) The extremely conservative approach relies less on long-term debt by financing only
a portion of long-term assets and the permanent net working capital with long-term debt.
4) The aggressive approach relies heavily on long -term debt by financing all long term assets and both the seasonal and permanent portions of net working capital
using long term debt.
Question 3.
At the seasonal low of the business cycle, the firm still requires a certain level of
current assets and current liabilities. Which of the following is true about this
level of current assets and current liabilities?
1)
2)
3)
4)
Assets required at the seasonal low are called seasonal temporary current
assets.
Spontaneous current liabilities required at the seasonal low are called
spontaneous seasonal liabilities.
Assets required at the seasonal low are called permanent current assets.
Spontaneous current liabilities required at the seasonal low are called the
liquidity buffer.
1
FN1 Module 9 Past Exam Questions Handout #2
Question 4: (2 marks)
Briefly explain how the financial planning process (FPP) can help achieve the
objective of maximizing firm value.
The financial planning process helps managers maximize firm value by inducing
managers to anticipate the future, analyze future scenarios, and ultimately choose those
actions, which lead to what is perceived to be the “most desirable” set of pro forma
statements.
Question 5: (4 marks):
Identify and briefly describe the elements required to construct pro forma financial
statements.
1. Input of forecasted exogenous data: Variables that have an impact on the pro
forma financial statements but are outside the financial control of the financial
executive.
2. The set of constraints limiting the choices of the financial executive: Aspects that
restrict the flexibility of the financial executive, for example, the credit and/or inventory
policy, the fact that the balance sheet must balance, or the fact that CCA is primarily a
function of capital assets in place.
3. The set of choice variables:
Strategic decisions including capital expenditures, capital structure, and dividends.
Question 6: (6 marks)
The final step in the financial planning process involves looking at the balance
between short-term and long-term financing.
(3)
(3)
(3)
i) Briefly explain what spontaneous financing is and why it must be
considered.
ii) Briefly explain why the decision between short-term and
long-term financing involves a risk-return tradeoff.
i) Spontaneous financing is the amount of financing that a company
obtains through trade payables and accrued liabilities. It needs to be
considered during the financial planning process because increases
(decreases) in spontaneous financing decrease (increase) the need
for other borrowing to finance current assets.
(3) ii) Short-term financing exposes the company to liquidity risk whereas longterm financing typically is more costly. Therefore, the decision
involves the tradeoff between the higher cost of long-term debt and
the liquidity risk associated with short-term debt.
2
FN1 Module 9 Past Exam Questions Handout #2
Question 7:
Briefly explain why it might be helpful to develop a cash flow statement from a
financial plan.
There are a number of reasons why it may be helpful to develop a cash
flow statement from a financial plan.
First, a cash flow statement allows for an evaluation of the relative
reliance on internal versus external sources of funds and thereby the
need to secure sources of external financing.
Second, it allows for an assessment of the appropriateness of financing
decisions by matching the term of the debt to the term of the asset.
Finally, because the cash flow statement details the changes in various
accounts, it can provide insights into trends that may be occurring in the
financial health of the organization.
Question 8:
An important tool the financial executive can employ in dealing with
uncertainty is the financial planning process. However, even before
considering the firm’s strategic alternatives, the financial executive
must try to anticipate future environmental changes. Identify three
environmental changes that should be considered and provide an
example of each.
Environmental changes:
1.
Changes in the competitive position of the firm: for example,
projected increases or decreases in competition over the next few
years, or changes in the form that the competition takes.
2.
Changes in the regulatory environment: for example,
environmental, safety, and/or product quality standards, or
taxes and royalties.
3.
Changes in the international environment: for example, changes
in international financial markets or international trading
conditions such as trade barriers.
4.
Changes in domestic financial markets: for example,
regulatory changes in domestic securities markets that could
make it either easier or more difficult to raise funds.
3