Question 1

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 2

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 3

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

Question 4

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)   $336.54F) C) and E)
G) B) and E)

Question 5

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 6

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

Question 7

If a firm's capital intensity ratio (A  */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 8

Last year Jain Technologies had $250 million of sales and $100 million of fixed assets,so its Fixed Assets/Sales ratio was 40%.However,its fixed assets were used at only 40% 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 Fixed Assets/Sales ratio should the company set?

Accepted Answer

A)   19.0%
B)   14.6%
C)   16.0%
D)   15.4%
E)   14.2%F) D) and E)
G) A) and D)

Question 9

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 10

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 11

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.F) A) and C)
G) B) and D)

Question 12

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

Question 13

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 14

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 15

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.F) C) and D)
G) A) and E)

Question 16

Jefferson City Computers 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 sharp increase in its forecasted sales.
B)   A sharp reduction in its forecasted sales.
C)   The company reduces its dividend payout ratio.
D)   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.
E)   The company discovers that it has excess capacity in its fixed assets.F) B) and E)
G) B) and D)

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   Any forecast of financial requirements involves determining how much money the firm will need,and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.
B)   The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet.Although a forecasted income statement may help clarify the results,income statement data are not essential because funds needed relate only to the balance sheet.
C)   Dividends are paid with cash taken from the accumulated retained earnings account,hence dividend policy does not affect the AFN forecast.
D)   A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed.
E)   If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales,then the AFN method will provide more accurate forecasts than the projected financial statement method.F) All of the above
G) A) and B)

Question 18

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

Accepted Answer

A)   Assumptions are made about future levels of sales,costs,and interest rates for use in the forecast.
B)   The entire financial plan is reexamined,assumptions are reviewed,and the management team considers how additional changes in operations might improve results.
C)   Projected ratios are calculated and analyzed.
D)   Develop a set of projected financial statements.
E)   Consult with key competitors about the optimal set of prices to charge,i.e. ,the prices that will maximize profits for our firm and its competitors.F) B) and E)
G) B) and C)

Question 19

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

Accepted Answer

A)   The mission statement.
B)   The statement of the corporate scope.
C)   The statement of cash flows.
D)   The statement of corporate objectives.
E)   The operating plan.F) A) and B)
G) A) and C)

Exam 16: Financial Planning and Forecasting

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

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's capital intensity ratio (A ^*/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

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

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

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

Jefferson City Computers 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

Correct Answer
verified

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

Correct Answer
verified

Spontaneously generated funds are generally defined as follows:

Correct Answer
verified

Which of the following statements is CORRECT?

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

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

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

Exam 16: Financial Planning and Forecasting

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

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's capital intensity ratio (A */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

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Jefferson City Computers 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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Spontaneously generated funds are generally defined as follows:

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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

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 Answer
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Correct Answer
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Correct Answer
verified

If a firm's capital intensity ratio (A ^*/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
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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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