Question 1

If a firm's capital intensity ratio 
$\left( \mathrm { A } _ { 0 } { } ^ { * } / \mathrm { S } _ { 0 } \right)$decreases as sales increase,use of the AFN formula is likely to understate the amount of additional funds required,other things held constant.

Accepted Answer

A) True 
 B)False

Question 2

As a firm's sales grow,its current assets also tend to increase.For instance,as sales increase,the firm's inventories generally increase,and purchases of inventories result in more accounts payable.Thus,spontaneously generated funds arise from transactions brought on by sales increases.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following assumptions is embodied in the AFN equation?

Accepted Answer

A)   All balance sheet accounts are tied directly to sales.
B)   Accounts payable and accruals are tied directly to sales.
C)   Common stock and long-term debt are tied directly to sales.
D)   Fixed assets,but not current assets,are tied directly to sales.
E)   Last year's total assets were not optimal for last year's sales.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   Once a firm has defined its purpose,scope,and objectives,it must develop a strategy or strategies for achieving its goals.The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals.
B)   A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
C)   Operating plans provide management with detailed implementation guidance,consistent with the corporate strategy,to help meet the corporate objectives.These operating plans can be developed for any time horizon,but many companies use a 5-year horizon.
D)   A firm's mission statement defines its lines of business and geographic area of operations.
E)   The corporate scope is a condensed version of the entire set of strategic plans.

Question 5

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio,while other inputs such as the tax rate and interest rate are not under its control.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   Since accounts payable and accrued liabilities must eventually be paid off,as these accounts increase,AFN as calculated by the AFN equation must also increase.
B)   Suppose a firm is operating its fixed assets at below 100% of capacity,but it has no excess current assets.Based on the AFN equation,its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
C)   If a firm retains all of its earnings,then it cannot require any additional funds to support sales growth.
D)   Additional funds needed (AFN) are typically raised using a combination of notes payable,long-term debt,and common stock.Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
E)   If a firm has a positive free cash flow,then it must have either a zero or a negative AFN.

Question 7

A typical sales forecast,though concerned with future events,will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Accepted Answer

A) True 
 B)False

Question 8

Last year Wei Guan Inc.had $625 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity.In millions,by how much could Wei Guan's sales increase before it is required to increase its fixed assets?

Accepted Answer

A)   $316.35
B)   $302.88
C)   $289.42
D)   $400.48
E)   $336.54

Question 9

The first,and most critical,step in constructing a set of forecasted financial statements is the sales forecast.

Accepted Answer

A) True 
 B)False

Question 10

If a firm with a positive net worth is operating its fixed assets at full capacity,if its dividend payout ratio is 100%,and if it wants to hold all financial ratios constant,then for any positive growth rate in sales,it will require external financing.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
B)   The first,and perhaps the most critical,step in forecasting financial requirements is to forecast future sales.
C)   Forecasted financial statements,as discussed in the text,are used primarily as a part of the managerial compensation program,where management's historical performance is evaluated.
D)   The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.
E)   The AFN equation produces more accurate forecasts than the forecasted financial statement method,especially if fixed assets are lumpy and economies of scale exist.

Question 12

To determine the amount of additional funds needed (AFN),you may subtract the expected increase in liabilities,which represents a source of funds,from the sum of the expected increases in retained earnings and assets,both of which are uses of funds.

Accepted Answer

A) True 
 B)False

Question 13

Spontaneously generated funds are generally defined as follows:

Accepted Answer

A)   Assets required per dollar of sales.
B)   A forecasting approach in which the forecasted percentage of sales for each item is held constant.
C)   Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.
D)   Funds that arise out of normal business operations from its suppliers,employees,and the government,and they include spontaneous increases in accounts payable and accruals.
E)   The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth.

Question 14

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Accepted Answer

A) True 
 B)False

Question 15

The term "additional funds needed (AFN) " is generally defined as follows:

Accepted Answer

A)   Funds that are obtained automatically from routine business transactions.
B)   Funds that a firm must raise externally from non-spontaneous sources,i.e. ,by borrowing or by selling new stock,to support operations.
C)   The amount of assets required per dollar of sales.
D)   The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
E)   A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.

Question 16

Howton & Howton Worldwide (HHW) is planning its operations for the coming year,and the CEO wants you to forecast the firm's additional funds needed (AFN) .Data for use in the forecast are shown below.However,the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%,which the firm's investment bankers have recommended.Based on the AFN equation,by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions.   Last year’s sales =S0$300 Last year’s accounts payable $50 Sal es growth rate =g40% Last year’s notes payable $15 Last year’s total assets =A02$500 Last year’s accruals $20 Last year’s profit margin = PM 20% Initi al payout ratio 10% New payout ratio 50%\begin{array}{llll}	ext { Last year&#x27;s sales }=\mathrm{S}_{0} & \$ 300 & 	ext { Last year&#x27;s accounts payable } & \$ 50 \	ext { Sal es growth rate }=\mathrm{g} & 40 \% & 	ext { Last year&#x27;s notes payable } & \$ 15 \	ext { Last year&#x27;s total assets }=\mathrm{A}_{0}{ }^{2} & \$ 500 & 	ext { Last year&#x27;s accruals } & \$ 20 \	ext { Last year&#x27;s profit margin = PM } &20 \% & 	ext { Initi al payout ratio } & 10 \% \& & 	ext { New payout ratio } & 50 \%\end{array} Last year’s sales =S0​ Sal es growth rate =g Last year’s total assets =A0​2 Last year’s profit margin = PM ​$30040%$50020%​ Last year’s accounts payable  Last year’s notes payable  Last year’s accruals  Initi al payout ratio  New payout ratio ​$50$15$2010%50%​ 
?

Accepted Answer

A)   $28.2
B)   $33.6
C)   $26.9
D)   $30.9
E)   $25.5

Question 17

Kamath-Meier Corporation's CFO uses this equation,which was developed by regressing inventories on sales over the past 5 years,to forecast inventory requirements: Inventories = $22.0 + 0.125(Sales) .The company expects sales of $275.0 million during the current year,and it expects sales to grow by 30% next year.What is the inventory forecast for next year? All dollars are in millions.

Accepted Answer

A)   $59.4
B)   $60.0
C)   $54.7
D)   $66.7
E)   $82.0

Question 18

A company expects sales to increase during the coming year,and it is using the AFN equation to forecast the additional capital that it must raise.Which of the following conditions would cause the AFN to increase?

Accepted Answer

A)   The company previously thought its fixed assets were being operated at full capacity,but now it learns that it actually has excess capacity.
B)   The company increases its dividend payout ratio.
C)   The company begins to pay employees monthly rather than weekly.
D)   The company's profit margin increases.
E)   The company decides to stop taking discounts on purchased materials. B

Question 19

A firm's profit margin is 5%,its debt ratio is 56%,and its dividend payout ratio is 40%.If the firm is operating at less than full capacity,then sales could increase to some extent without the need for external funds,but if it is operating at full capacity with respect to all assets,including fixed assets,then any positive growth in sales will require some external financing.

Accepted Answer

A) True 
 B)False  False

Question 20

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales,assuming the firm is operating with a positive profit margin.

Accepted Answer

A) True 
 B)False

Exam 17: Financial Planning and Forecasting

If a firm's capital intensity ratio $\left( \mathrm { A } _ { 0 } { } ^ { * } / \mathrm { S } _ { 0 } \right)$ decreases as sales increase,use of the AFN formula is likely to understate the amount of additional funds required,other things held constant.

Correct Answer
verified

As a firm's sales grow,its current assets also tend to increase.For instance,as sales increase,the firm's inventories generally increase,and purchases of inventories result in more accounts payable.Thus,spontaneously generated funds arise from transactions brought on by sales increases.

Correct Answer
verified
True

Which of the following assumptions is embodied in the AFN equation?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio,while other inputs such as the tax rate and interest rate are not under its control.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A typical sales forecast,though concerned with future events,will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Correct Answer
verified

Last year Wei Guan Inc.had $625 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity.In millions,by how much could Wei Guan's sales increase before it is required to increase its fixed assets?

Correct Answer
verified

The first,and most critical,step in constructing a set of forecasted financial statements is the sales forecast.

Correct Answer
verified

If a firm with a positive net worth is operating its fixed assets at full capacity,if its dividend payout ratio is 100%,and if it wants to hold all financial ratios constant,then for any positive growth rate in sales,it will require external financing.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

To determine the amount of additional funds needed (AFN),you may subtract the expected increase in liabilities,which represents a source of funds,from the sum of the expected increases in retained earnings and assets,both of which are uses of funds.

Correct Answer
verified

Spontaneously generated funds are generally defined as follows:

Correct Answer
verified

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Correct Answer
verified

The term "additional funds needed (AFN) " is generally defined as follows:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

A company expects sales to increase during the coming year,and it is using the AFN equation to forecast the additional capital that it must raise.Which of the following conditions would cause the AFN to increase?

Correct Answer
verified
B

Correct Answer
verified
False

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales,assuming the firm is operating with a positive profit margin.

Correct Answer
verified

Exam 17: Financial Planning and Forecasting

If a firm's capital intensity ratio (A0∗/S0)\left( \mathrm { A } _ { 0 } { } ^ { * } / \mathrm { S } _ { 0 } \right)(A0​∗/S0​) decreases as sales increase,use of the AFN formula is likely to understate the amount of additional funds required,other things held constant.

Correct AnswerverifiedShow Answer

As a firm's sales grow,its current assets also tend to increase.For instance,as sales increase,the firm's inventories generally increase,and purchases of inventories result in more accounts payable.Thus,spontaneously generated funds arise from transactions brought on by sales increases.

Correct AnswerverifiedTrue

Which of the following assumptions is embodied in the AFN equation?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio,while other inputs such as the tax rate and interest rate are not under its control.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A typical sales forecast,though concerned with future events,will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Correct AnswerverifiedShow Answer

Last year Wei Guan Inc.had $625 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity.In millions,by how much could Wei Guan's sales increase before it is required to increase its fixed assets?

Correct AnswerverifiedShow Answer

The first,and most critical,step in constructing a set of forecasted financial statements is the sales forecast.

Correct AnswerverifiedShow Answer

If a firm with a positive net worth is operating its fixed assets at full capacity,if its dividend payout ratio is 100%,and if it wants to hold all financial ratios constant,then for any positive growth rate in sales,it will require external financing.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

To determine the amount of additional funds needed (AFN),you may subtract the expected increase in liabilities,which represents a source of funds,from the sum of the expected increases in retained earnings and assets,both of which are uses of funds.

Correct AnswerverifiedShow Answer

Spontaneously generated funds are generally defined as follows:

Correct AnswerverifiedShow Answer

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Correct AnswerverifiedShow Answer

The term "additional funds needed (AFN) " is generally defined as follows:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A company expects sales to increase during the coming year,and it is using the AFN equation to forecast the additional capital that it must raise.Which of the following conditions would cause the AFN to increase?

Correct AnswerverifiedB

Correct AnswerverifiedFalse

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales,assuming the firm is operating with a positive profit margin.

Correct AnswerverifiedShow Answer

If a firm's capital intensity ratio $\left( \mathrm { A } _ { 0 } { } ^ { * } / \mathrm { S } _ { 0 } \right)$ decreases as sales increase,use of the AFN formula is likely to understate the amount of additional funds required,other things held constant.

Correct Answer
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True

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B

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False

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