Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

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

Question 3

Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets. 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?

Accepted Answer

A)   28.5%
B)   30.0%
C)   31.5%
D)   33.1%
E)   34.7%F) B) and E)
G) C) and D)

Question 4

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) ?

Accepted Answer

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 offers a longer credit period (with all other terms held equal) .
D)   The company discovers that it has excess capacity in its fixed assets.
E)   A sharp increase in its forecasted sales.F) B) and D)
G) C) and E)

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital. Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible.

Accepted Answer

A) True 
 B)False

Question 8

If Decker had a financing surplus, it could remedy the situation by

Accepted Answer

A)   borrowing on its line of credit.
B)   issuing more common stock.
C)   reducing its dividend.
D)   borrowing from its retained earnings
E)   paying a special dividendF) C) and E)
G) None of the above

Question 9

Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence, they have a greater need for external financing. There are currently no alternatives for these types of firms to lower their asset requirements.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
C)   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.
D)   If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
E)   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.F) A) and C)
G) C) and E)

Question 11

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 12

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

Accepted Answer

A)   54.30%
B)   57.16%
C)   60.17%
D)   63.33%
E)   66.67%F) A) and B)
G) A) and C)

Question 13

If a firm's capital intensity ratio (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.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

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?

Accepted Answer

A)   $312.5
B)   $328.1
C)   $344.5
D)   $361.8
E)   $379.8F) A) and B)
G) C) and E)

Question 17

-Refer to the Judd Enterprises financial statements. What is Judd's projected retained earnings under this plan?

Accepted Answer

A)   $339
B)   $377
C)   $396
D)   $415
E)   $440F) B) and D)
G) A) and B)

Question 18

Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN) . The firm is operating at full capacity. 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.

Accepted Answer

A)   $102.8
B)   $108.2
C)   $113.9
D)   $119.9
E)   $125.9F) None of the above
G) C) and E)

Question 19

Spontaneous funds are generally defined as follows:

Accepted Answer

A)   A forecasting approach in which the forecasted percentage of sales for each item is held constant.
B)   Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
C)   Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.
D)   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.
E)   Assets required per dollar of sales.F) C) and D)
G) B) and C)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 12: Financial Planning and Forecasting Financial Statements

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.

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital. Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible.

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

Correct Answer
verified

Correct Answer
verified

Spontaneous funds are generally defined as follows:

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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?

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

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) ?

Correct Answer
verified

-Refer to the Judd Enterprises financial statements. What is Judd's projected retained earnings under this plan?

Correct Answer
verified

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

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

Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence, they have a greater need for external financing. There are currently no alternatives for these types of firms to lower their asset requirements.

Correct Answer
verified

If Decker had a financing surplus, it could remedy the situation by

Correct Answer
verified

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.

Correct Answer
verified

If a firm's capital intensity ratio (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 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

Exam 12: Financial Planning and Forecasting Financial Statements

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital. Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible.

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Spontaneous funds are generally defined as follows:

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

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

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) ?

Correct AnswerverifiedShow Answer

-Refer to the Judd Enterprises financial statements. What is Judd's projected retained earnings under this plan?

Correct AnswerverifiedShow Answer

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

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

Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence, they have a greater need for external financing. There are currently no alternatives for these types of firms to lower their asset requirements.

Correct AnswerverifiedShow Answer

If Decker had a financing surplus, it could remedy the situation by

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

If a firm's capital intensity ratio (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

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 AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

If a firm's capital intensity ratio (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 Answer
verified

Correct Answer
verified