FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 5: Financial Planning and Forecasting Financial Statements

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 1

Multiple Choice

Review LaterAdd Note

Review Later

Which assumption is embodied in the AFN formula forecasting method?

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) B) and C)
F) C) and D)

Correct Answer

verified

Show Answer

Question 2

True/False

Review LaterAdd Note

Review Later

Pro forma financial statements are used primarily to assess a firm's historical performance.

A) True
B) False

Correct Answer

verified

Show Answer

Question 3

Multiple Choice

Review LaterAdd Note

Which term best describes a relationship in which very large increases in sales require very little additional inventory?

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. $\begin{array}{l}\begin{array}{lll} \text { Last year's sales = S0 } &\$ 300.0 \\ \text { Sales growth rate= g } &40 \% \\ \text { Last year's total assets =A 0 } & \$ 500.0 \\ \text { Last year's pro fit } \operatorname{margin}=\mathrm{MI} & 20.0 \% \\\end{array}\begin{array}{lll} \text { Last year's accounts payable } &\$ 50.0 \\ \text { Last year's notes payable (to bank) } &\$ 15.0 \\ \text { Last year's accruals } & \$ 20.0 \\ \text { Initial payout ratio } & 10.0 \%\\ \text { New payout ratio }&50.0 \% \end{array}\end{array}$

Which of the following best defines the term "spontaneously generated funds"?

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?

ABC Co.is planning its operations for next year,and Ronnie Clayton,the CEO,wants you to forecast the firm's additional funds needed (AFN) .Data for use in your forecast are shown below.Based on the AFN equation,what is the AFN for the coming year? Dollars are in millions. $\begin{array}{llll}\text { Last year's sales }=\text { So } & \$ 350 & \text { Last year's accounts payable } & \$ 40 \\\text { Sales growth rate }=g & 30 \% & \text { Last year's notes payable (to bank) } & \$ 50 \\\text { Last year's total assets }=\text { An } & \$ 500 & \text { Last year's accruals } & \$ 30 \\\text { Last year's profit margin }=M & 5 \% & \text { Target payout ratio } & 60 \%\end{array}$

Which of the following is NOT an issue in the process of the FFS method?

Suppose that 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 $400 million during the current year,and it expects sales to grow by 30% next year.All dollars are in millions.What is the inventory forecast for next year?

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.

Suppose a firm has net income of $8 on sales of $40,fixed assets of $75,and total assets of $90.The firm retains 50% of its earnings.If the firm is operating at 80% capacity,what are the full capacity sales?

Suppose that a firm's profit margin is 5%,its debt/assets 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; however,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.

One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with sales.

Which of the following statements is correct?

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 AFN formula would be appropriate if,in a regression of each asset and spontaneous liability on sales,the regression line was linear and passed through the origin.

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?

Last year Emery Industries had $450 million of sales and $225 million of fixed assets,so its FA/Sales ratio was 50%.However,its fixed assets were used at only 65% of capacity.If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity,with sales held constant at $450 million,how much cash (in millions) would it have generated?

When we use the AFN formula to forecast the additional funds needed,we are implicitly assuming that all financial ratios are constant.This means,for example,that if you plotted a graph of inventories versus sales,the regression line would be linear and would have a positive (non-zero) Y-intercept.

Which of the following is the most critical step in constructing pro forma financial statements?