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Exam 17: Financial Planning and Forecasting

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Question 1

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Spontaneously generated funds are generally defined as follows:

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.

F) C) and D)
G) A) and C)

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Question 2

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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.

A) True
B) False

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Question 3

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Which of the following is NOT a key element in strategic planning as it is described in the text?

(17-5) Forecasting financial reqs. C K Answer: c MEDIUM/

One of the key steps in the development of the forecasted balance sheet is to identify those assets and liabilities that increase at the same rate as sales.

Which of the following is NOT one of the steps taken in the financial planning process?

The capital intensity ratio is generally defined as follows:

Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its FA/Sales ratio was 40%. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?

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.

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

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

If a firm's capital intensity ratio (A*0/S0) decreases as sales increase, use of the AFN formula is likely to understate the amount of additional funds required, other things held constant.

Two firms with identical capital intensity ratios are generating the same amount of sales. However, Firm A is operating at full capacity, while Firm B is operating below capacity. If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.

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

Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

Last year Godinho Corp. had $250 million of sales, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?

If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it will require some amount of external funding.

Fairchild Garden Supply expects $600 million of sales this year, and it forecasts a 15% increase for next year. The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.25(Sales) . All dollars are in millions. What is the projected inventory turnover ratio for the coming year?

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

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.