FAC Financial Planning & Forecasting 3 — Questions and Answers
Question 1: A firm has a net profit margin of 5%, an asset turnover of 2.0, and an equity multiplier of 1.5. What is its return on equity (ROE)?
- 10%
- 15% (Correct answer)
- 20%
- 7.5%
Correct answer: 15%
Using the DuPont formula: ROE = 5% × 2.0 × 1.5 = 15%.
Question 2: Which forecasting method uses historical data to identify patterns such as trend, seasonality, and cycles to project future values?
- Delphi method
- Regression analysis
- Time series analysis (Correct answer)
- Bottom-up forecasting
Correct answer: Time series analysis
Time series analysis extracts patterns from historical data over time to forecast future outcomes.
Question 3: In a scenario analysis for financial planning, the 'bear case' scenario typically assumes:
- Above-average revenue growth and stable costs
- Most likely market conditions
- Adverse conditions such as lower revenues and higher costs (Correct answer)
- Optimal capital structure
Correct answer: Adverse conditions such as lower revenues and higher costs
The bear case represents a pessimistic scenario with unfavorable conditions to stress-test the financial plan.
Question 4: What does the 'plug' figure represent in a pro forma balance sheet?
- The firm's net income for the period
- The external financing needed to balance assets with liabilities and equity (Correct answer)
- The change in retained earnings
- The depreciation expense for the period
Correct answer: The external financing needed to balance assets with liabilities and equity
The plug is the additional external financing required when projected assets exceed projected liabilities and equity.
Question 5: A company with $10 million in sales wants to maintain a cash conversion cycle of 30 days. Which of the following actions would REDUCE the cash conversion cycle?
- Extending credit terms offered to customers
- Delaying payments to suppliers (Correct answer)
- Increasing raw material safety stock
- Slowing the production process
Correct answer: Delaying payments to suppliers
Delaying supplier payments increases days payable outstanding, which shortens the cash conversion cycle (CCC = DIO + DSO – DPO).
Question 6: Which capital budgeting method best accounts for the time value of money when evaluating long-term investment projects?
- Payback period
- Accounting rate of return
- Net present value (NPV) (Correct answer)
- Gross profit margin analysis
Correct answer: Net present value (NPV)
NPV discounts all future cash flows to present value, directly incorporating the time value of money.
Question 7: If a company's actual sales are higher than budgeted, a favorable sales volume variance will MOST LIKELY result in:
- Higher fixed costs per unit
- Lower variable costs in total
- Higher contribution margin in total (Correct answer)
- Lower operating leverage
Correct answer: Higher contribution margin in total
More units sold at the same contribution margin per unit increases total contribution margin and operating income.
FAC Financial Planning & Forecasting 3
A firm has a net profit margin of 5%, an asset turnover of 2.0, and an equity multiplier of 1.5.
What is its return on equity (ROE)?