FAC Financial Planning & Forecasting 2 — Questions and Answers
Question 1: A company uses the percent-of-sales method to forecast its balance sheet. If sales increase by 20% and accounts receivable is currently $500,000, what is the projected accounts receivable?
- $500,000
- $550,000
- $600,000 (Correct answer)
- $650,000
Correct answer: $600,000
Using percent-of-sales, accounts receivable scales proportionally with sales: $500,000 × 1.20 = $600,000.
Question 2: Which of the following is an example of a spontaneous liability that typically increases automatically with sales growth?
- Long-term bonds payable
- Notes payable to bank
- Accounts payable (Correct answer)
- Deferred tax liability
Correct answer: Accounts payable
Accounts payable arises from purchasing inventory on credit and rises naturally as sales and purchases increase.
Question 3: In a rolling forecast, which characteristic distinguishes it from a traditional annual budget?
- It is prepared only once per year
- It always covers exactly 12 months regardless of the current date
- It is continuously updated to maintain a constant forward-looking horizon (Correct answer)
- It eliminates the need for variance analysis
Correct answer: It is continuously updated to maintain a constant forward-looking horizon
A rolling forecast is updated regularly (monthly or quarterly), always projecting a fixed number of periods ahead.
Question 4: A firm's sustainable growth rate is best described as the rate at which it can grow while:
- Maintaining its current debt-to-equity ratio and without issuing new equity (Correct answer)
- Maximizing dividend payout to shareholders
- Increasing its asset turnover ratio each year
- Reducing its profit margin
Correct answer: Maintaining its current debt-to-equity ratio and without issuing new equity
The sustainable growth rate (ROE × retention ratio) reflects growth achievable without altering financial leverage or selling new stock.
Question 5: When building a cash flow forecast, which item is added back to net income to convert it to operating cash flow?
- Dividend payments
- Capital expenditures
- Depreciation and amortization (Correct answer)
- Repayment of long-term debt
Correct answer: Depreciation and amortization
Depreciation is a non-cash charge deducted in arriving at net income, so it is added back to reconcile to operating cash flow.
Question 6: A company forecasts free cash flow of $2 million per year growing at 3% indefinitely, with a WACC of 8%. What is the estimated terminal value?
- $25 million
- $40 million (Correct answer)
- $66.7 million
- $20 million
Correct answer: $40 million
Terminal value = FCF / (WACC – g) = $2M / (0.08 – 0.03) = $2M / 0.05 = $40 million.
Question 7: Which financial planning technique separates costs into fixed and variable components to better predict behavior at different activity levels?
- Zero-based budgeting
- Activity-based budgeting
- Flexible budgeting (Correct answer)
- Capital rationing
Correct answer: Flexible budgeting
A flexible budget adjusts budgeted amounts based on actual activity levels by distinguishing fixed from variable costs.
FAC Financial Planning & Forecasting 2
A company uses the percent-of-sales method to forecast its balance sheet.
If sales increase by 20% and accounts receivable is currently $500,000, what is the projected accounts receivable?