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Exam 9: Corporate Valuation and Financial Planning

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Question 1

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F.Marston,Inc.has developed a forecasting model to estimate its AFN for the upcoming year.All else being equal,which of the following factors is most likely to lead to an increase of the additional funds needed (AFN) ?

A) A switch to a just-in-time inventory system and outsourcing production.
B) The company reduces its dividend payout ratio.
C) The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
D) The company discovers that it has excess capacity in its fixed assets.
E) A sharp increase in its forecasted sales.

F) B) and E)
G) A) and B)

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Question 2

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These are the simplified financial statements for Judd Enterprises. $\begin{array}{l}\begin{array} { l c r } \text { Income statement } && \text { CurrentFrojected } \\\text { Sales } & \text { na } & 1,000 \\\text { Costs } & \text { na } & 700 \\\text { Profit before tax } & \text { na } & 300 \\\text { Taxes } & \text { na } & 90 \\\text { Net income } & \text { na } & 210 \\\text { Dividends } & \text { na } & 63\end{array}\\\\\begin{array} { l c r l c r } \text { Balance sheets } & \text { Current } & \text { Projected } & & \text { Current } \text { Projected } \\\text { Current assets } & 100 & 115 & \text { Current liabilities } & 70 & 81 \\\text { Net fixed assets } & 900 & 1,080 & \text { Long-term debt } & 400 \\& & & \text { Common stock } & 300 \\& & & \text { Retained earnings } & 230\end{array}\end{array}$ -Refer to the Judd Enterprises financial statements.If Judd does not plan on issuing new stock or additional long-term debt,then what is the additional net financing needed for the projected year?

A) $30
B) $33
C) $37
D) $339
E) $396

F) D) and E)
G) C) and D)

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Question 3

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One of the necessary steps in the financial planning process is a forecast of financial statements under each alternative version of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.

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?

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.

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,spontaneous liabilities that reduce AFN arise from transactions brought on by sales increases.

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.

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.

Which of the following statements is CORRECT?

One of the first steps in arriving at a firm's forecasted financial statements is a review of industry-average operating ratios relative to these same ratios for the firm to determine whether changes to the ratios need to be made.

A firm's AFN must come from external sources.Typical sources include short-term bank loans,long-term bonds,preferred stock,and common stock.

Weber Interstate Paving Co.had $450 million of sales and $225 million of fixed assets last year,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?

You have been asked to forecast the additional funds needed (AFN) for Houston,Hargrove,& Worthington (HHW) ,which is planning its operation for the coming year.The firm is operating at full capacity.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. $\begin{array}{lc}\text { Last year's sales }=S_{0} & \$ 300.0 \text { Last year's accounts payable }&\$50.0 \\\text { Sales growth rate }=g & 40 \% \text { Last year's notes payable } &\$15.0\\\text { Last year's total assets }=A_{0} * & \$ 500.0 \text { Last year's accruals } &\$20.0\\\text { Last year's pro fit margin }=\text { PM } & 20.0 \% \text { Initial payout ratio }&10.0\%\end{array}$

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

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

Spontaneous funds are generally defined as follows:

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

Below are the simplified current and projected financial statements for Decker Enterprises. All of Decker's assets are operating assets. All of Decker's current liabilities are operating liabilities. -If Decker had a financing surplus,it could remedy the situation by

The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.

The Besnier Company had $250 million of sales last year,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?