chapter 18 HW
1). Financial planning true or false? Explain.
a. Financial planning should attempt to minimize risk.
False. Financial planning is a process of deciding what risk is best
b. The primary aim of financial planning is to obtain better forecasts of future cash flows and earnings.
False. Financial planning is concerned with possible surprises as well as the most likely outcomes.
c. Financial planning is necessary because financing and investing decisions interact and should not be made independently.
True: It considers both the financing and investment decisions.
d. Firms planning horizons rarely exceed 3 years a typical horizon for long-term panning is 5 years.
e. Individual capital investment projects are not considered in a financial plan unless they are very large
True. They are usually accumulated by category.
f. Financial planning requires accurate and consistent forecasting
True. Accuracy and consistency is hard to achieve but a firm needs to be as consistent as possible.
g. Financial planning models should include as much detail as possible.
False. Excessive detail distracts attention from the crucial decisions.
5). Percentage of sales models assumes that most of the variables will vary in proportion to sales. However, firms can increase sales without increasing their fixed assets but by running their companies at higher capacity and considering to pay their employees overtime. In this case, assets would rise less than proportionally to sales, but the wages would raise more since the overtime wage rates are higher than the normal rates. Working capital could rise less than proportionally to sales since firms can exploit economies of scale in working capital management as sales increase. The percentage of sales models are better for long term planning, while in short term they must deal with specific and detailed cash needs over the short horizons. They cannot ignore variations to in the relationships among the balance sheet items. Long-term
a. Financial planning should attempt to minimize risk.
False. Financial planning is a process of deciding what risk is best
b. The primary aim of financial planning is to obtain better forecasts of future cash flows and earnings.
False. Financial planning is concerned with possible surprises as well as the most likely outcomes.
c. Financial planning is necessary because financing and investing decisions interact and should not be made independently.
True: It considers both the financing and investment decisions.
d. Firms planning horizons rarely exceed 3 years a typical horizon for long-term panning is 5 years.
e. Individual capital investment projects are not considered in a financial plan unless they are very large
True. They are usually accumulated by category.
f. Financial planning requires accurate and consistent forecasting
True. Accuracy and consistency is hard to achieve but a firm needs to be as consistent as possible.
g. Financial planning models should include as much detail as possible.
False. Excessive detail distracts attention from the crucial decisions.
5). Percentage of sales models assumes that most of the variables will vary in proportion to sales. However, firms can increase sales without increasing their fixed assets but by running their companies at higher capacity and considering to pay their employees overtime. In this case, assets would rise less than proportionally to sales, but the wages would raise more since the overtime wage rates are higher than the normal rates. Working capital could rise less than proportionally to sales since firms can exploit economies of scale in working capital management as sales increase. The percentage of sales models are better for long term planning, while in short term they must deal with specific and detailed cash needs over the short horizons. They cannot ignore variations to in the relationships among the balance sheet items. Long-term