Financial Projection Sensitivity Analysis
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Questions and Answers

What is the primary focus of the sensitivity analysis discussed in the text?

  • Determining the appropriate levels of debt and equity financing
  • Preparing several projections to examine best and worst case scenarios
  • Analyzing the impact of changes in assumptions on financing requirements, return on assets and equity (correct)
  • Identifying the areas requiring greater scrutiny based on the assumptions with the greatest impact

    • If capital expenditures increase to 7.5% of sales, what would happen to the cash balance according to the text?

  • The cash balance will remain unchanged
  • The cash balance will be below the level of prior years
  • The cash balance will decline to $845 million, 2.4% of total assets (correct)
  • The cash balance will increase to $3.9 billion

    • What does the text state is central to security analysis?

  • Projecting financial statements
  • Prospective analysis (correct)
  • Sensitivity analysis
  • Residual income valuation model

    • What would also result in similar increases in financing requirements?

    <p>Both (a) and (b)</p> Signup and view all the answers

    What is the purpose of the residual income valuation model mentioned in the text?

    <p>To define equity value as the sum of current book value and the present value of all future expected residual income</p> Signup and view all the answers

    What is the primary purpose of the projected financial statements discussed in the text?

    <p>To be based on expected relations between income statement and balance sheet accounts</p> Signup and view all the answers

    What percentage of sales is used in the projection for SG&A expense?

    <p>22.49%</p> Signup and view all the answers

    How is the gross profit calculated in the income statement projection?

    <p>$17,157= $52,204 X 32.866%</p> Signup and view all the answers

    What ratio was used to calculate the historical interest expense relative to beginning-of-year interest-bearing debt?

    <p>5.173%</p> Signup and view all the answers

    What amount is projected for tax expense based on the given information?

    <p>$493</p> Signup and view all the answers

    Which item is NOT included in the calculation of income before tax in the income statement projection?

    <p>Tax expense</p> Signup and view all the answers

    Which balance sheet item is used to calculate depreciation and amortization in the income statement projection?

    <p>Beginning-of-year balance of property, plant, and equipment</p> Signup and view all the answers

    Which financial statement is typically projected first when conducting prospective analysis?

    <p>Income statement</p> Signup and view all the answers

    What is the first step in projecting the income statement?

    <p>Projecting the expected growth in sales</p> Signup and view all the answers

    Which of the following is NOT typically used to project the expected growth in sales?

    <p>Dividend payout ratio</p> Signup and view all the answers

    Based on the information provided, what was Target's projected gross profit margin for 2006?

    <p>32.866%</p> Signup and view all the answers

    What is the purpose of conducting sensitivity analysis after completing the initial financial statement projections?

    <p>To assess the impact of changes in key assumptions on the projected financial statements</p> Signup and view all the answers

    Which of the following financial statements is NOT explicitly mentioned as part of the projection process in the given text?

    <p>Statement of stockholders' equity</p> Signup and view all the answers

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