Question 1

The AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time. However, this assumption can be relaxed when we use the forecasted financial statement method. Three conditions where constant ratios cannot be assumed are economies of scale, lumpy assets, and excess capacity.

Accepted Answer

A) True 
 B)False

Question 2

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?

Accepted Answer

A)   $170.09
B)   $179.04
C)   $188.46
D)   $197.88
E)   $207.78F) A) and E)
G) A) and D)

Question 3

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

Accepted Answer

A)   buying back common stock
B)   paying a special dividend
C)   paying down its long-term debt
D)   borrowing on its line of credit
E)   borrowing from retained earningsF) A) and B)
G) C) and D)

Question 4

In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecast the firm's additional funds needed (AFN)  for next year. 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?

Accepted Answer

A)   −$14,440
B)   −$15,200
C)   −$16,000
D)   −$16,800
E)   −$17,640F) A) and B)
G) None of the above

Question 5

As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's expansion.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's AFN to be negative.
B)   If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual AFN must, mathematically, exceed the previously calculated AFN.
C)   Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
D)   Dividend policy does not affect the requirement for external funds based on the AFN equation.
E)   The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.F) A) and D)
G) C) and D)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.
C)   A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed.
D)   If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method.
E)   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.F) C) and D)
G) B) and C)

Question 8

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.

Accepted Answer

A)   $31.9
B)   $33.6
C)   $35.3
D)   $37.0
E)   $38.9F) All of the above
G) A) and B) B

Question 9

The capital intensity ratio is generally defined as follows:

Accepted Answer

A)   The percentage of liabilities that increase spontaneously as a percentage of sales.
B)   The ratio of sales to current assets.
C)   The ratio of current assets to sales.
D)   The amount of assets required per dollar of sales, or A0*/S0.
E)   Sales divided by total assets, i.e., the total assets turnover ratio.F) B) and E)
G) A) and C) D

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
B)   Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management's historical performance is evaluated.
C)   The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.
D)   The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists.
E)   Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.F) C) and D)
G) D) and E)

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)   Accounts payable and accruals are tied directly to sales.
B)   Common stock and long-term debt are tied directly to sales.
C)   Fixed assets, but not current assets, are tied directly to sales.
D)   Last year's total assets were not optimal for last year's sales.
E)   None of the firm's ratios will change.F) C) and D)
G) A) and C)

Question 13

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

Accepted Answer

A)   Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
B)   The amount of assets required per dollar of sales.
C)   The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
D)   A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
E)   Funds that are obtained automatically from routine business transactions.F) B) and E)
G) C) and D)

Question 14

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

Accepted Answer

A)   Monitor operations after implementing the plan to spot any deviations and then take corrective actions.
B)   Determine the amount of capital that will be needed to support the plan.
C)   Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
D)   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.
E)   Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.F) A) and B)
G) A) and C)

Question 15

The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate. It can be calculated by using the AFN equation with AFN equal to zero and solving for
g.

Accepted Answer

A) True 
 B)False  False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.
B)   Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process.
C)   For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.
D)   There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases. The Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship.
E)   When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0)  vary from year to year in a stable, predictable manner.F) A) and C)
G) C) and D)

Question 17

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, 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 18

Operating plans sketch out broad approaches for realization of the firm's strategic vision. These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.

Accepted Answer

A) True 
 B)False

Question 19

A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 12: Financial Planning and Forecasting Financial Statements

Correct Answer
verified

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?

Correct Answer
verified

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

Correct Answer
verified

In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecast the firm's additional funds needed (AFN) for next year. 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?

Correct Answer
verified

As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's expansion.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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B

The capital intensity ratio is generally defined as follows:

Correct Answer
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D

Which of the following statements is CORRECT?

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

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

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

Correct Answer
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The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate. It can be calculated by using the AFN equation with AFN equal to zero and solving for g.

Correct Answer
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False

Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Operating plans sketch out broad approaches for realization of the firm's strategic vision. These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.

Correct Answer
verified

A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.

Correct Answer
verified

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

Correct Answer
verified

Exam 12: Financial Planning and Forecasting Financial Statements

Correct AnswerverifiedShow Answer

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecast the firm's additional funds needed (AFN) for next year. 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?

Correct AnswerverifiedShow Answer

As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's expansion.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

The capital intensity ratio is generally defined as follows:

Correct AnswerverifiedD

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate. It can be calculated by using the AFN equation with AFN equal to zero and solving for g.

Correct AnswerverifiedFalse

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Operating plans sketch out broad approaches for realization of the firm's strategic vision. These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.

Correct AnswerverifiedShow Answer

A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
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B

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D

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False

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