Question 1

Judd Enterprises
These are the simplified financial statements for Judd
Enterprises.
$\begin{array} { l r r } \text { Income statement } & \text { Current } & \text { Frojected } \ \text { Sales } & \text { na } & 1,000 \ \text { Costs } & \text { na } & \underline{720 }\ \text { Profit before tax } & \text { na } & 280 \ \text { Taxes } ( 25 \% ) & \text { na } & 70 \ \text { Net income } & \text { na } & 210 \ \text { Dividends } & \text { na } & 63 \end{array}$

$\begin{array} { l r r r r r } \text { Balance sheets } & \text { Current } & \text { Projected } && \text { Current } & \text { Projected } \ \text { Current assets } & 100 & 115 & \text { Current } & 70 & 81 \ \text { Net fixed assets } & 900 & 1,080& \text { liabilities } & \ & & & \text { Long-term debt } & 400 \ & & & \text { Common stock } & 300 \ & & & \text { Retained } & 230\&&&\text { earnings } \end{array}$  
-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?

Accepted Answer

The additional net financing needed is calculated as the increase in assets minus the increase in liabilities and retained earnings. The increase in assets is $95 (from $1000 to $1195), and the increase in liabilities and retained earnings is $58 (from $700 to $758). Therefore, the additional net financing needed is $95 - $58 = $37.

Question 2

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

False

Question 3

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

Operating plans are indeed focused on the short term, typically covering a 1-year period, but they are detailed plans outlining specific actions and resources needed to achieve the strategic objectives, not just broad approaches. Strategic plans are the ones that outline the broad approaches for realizing the firm's vision, usually over a longer time horizon.

Question 4

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

Forecasting financial statements for each alternative operating plan is a crucial step in financial planning as it helps in analyzing the impact of different operating procedures on projected profits and financial ratios.

Question 5

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

Spontaneous funds refer to funds generated from the operations of a business such as accounts payable, accounts receivable, and inventory. A firm will generally prefer to use these funds to finance their operations as they do not incur interest or require collateral. However, there may be limitations to their usage due to factors such as credit terms, contracts with workers, and tax laws. Therefore, the statement is true that there is little flexibility in their usage.

Question 6

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

AFN (additional funds needed) represents the amount of external funding required by a company to support its projected growth. This external funding can come from various sources, including short-term bank loans, long-term bonds, preferred stock, and common stock. Therefore, the statement is true.

Question 7

Decker Enterprises
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 li abilities. 
$\begin{array} { l c r } \text { Income statement } & \text { Current} & \text { Projected } \ \text { Sales } & \text { na } & 1,500 \ \text { Costs } & \text { na } & 1,080 \ \text { Profit before tax } & \text { na } & 420 \ \text { Taxes } ( 25 \% ) & \text { na } &\underline{ 105} \ \text { Net income } & \text { na } & 315 \ \text { Dividends } & \text { na } & 95 \end{array}$
$\begin{array} { l r r l r r } \text { Balance sheets } & \text { Current } & \text { Projected } & & \text { Current } & \text { Projected } \ \text { Current assets } & 100 & 115 & \text { Current liabilities } & 70 & 81 \ \text { Net fixed assets } & 1,200 & 1,440 & \text { Long-term debt } & 300 & 360 \ & & & \text { Common stock } & 500 & 500 \ & & & \text { Retained earnings } & 430 & 650 \end{array}$ 
-If Decker had a financing surplus, it could remedy the situation by

Accepted Answer

If Decker had a financing surplus, it could pay a special dividend to distribute the excess funds to shareholders.

Question 8

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

The answer of The fact that long-term debt and common...

Question 9

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

Accepted Answer

Consulting with key competitors about pricing is not a step in the financial planning process as it could lead to antitrust violations and potential legal issues.

Question 10

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

Spontaneous liabilities, like accounts payable, may not always be the cheapest source of capital due to potential trade-offs such as loss of supplier goodwill, discounts for early payment, or strained supplier relationships.

Question 11

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.

Accepted Answer

The capital intensity ratio is a measure of how much investment is required to produce a given level of sales, and thus has a significant impact on a company's capital requirements. A high capital intensity ratio means that a company requires significant investment in assets to generate sales, while a low ratio indicates that fewer assets are needed.

Question 12

Decker Enterprises
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 li abilities. 
$\begin{array} { l c r } \text { Income statement } & \text { Current} & \text { Projected } \ \text { Sales } & \text { na } & 1,500 \ \text { Costs } & \text { na } & 1,080 \ \text { Profit before tax } & \text { na } & 420 \ \text { Taxes } ( 25 \% ) & \text { na } &\underline{ 105} \ \text { Net income } & \text { na } & 315 \ \text { Dividends } & \text { na } & 95 \end{array}$
$\begin{array} { l r r l r r } \text { Balance sheets } & \text { Current } & \text { Projected } & & \text { Current } & \text { Projected } \ \text { Current assets } & 100 & 115 & \text { Current liabilities } & 70 & 81 \ \text { Net fixed assets } & 1,200 & 1,440 & \text { Long-term debt } & 300 & 360 \ & & & \text { Common stock } & 500 & 500 \ & & & \text { Retained earnings } & 430 & 650 \end{array}$ 
-Based on the projections, Decker will have

Accepted Answer

Decker's projected net income is $315, and its projected dividends are $95. Therefore, Decker's projected financing surplus is $315 - $95 = $220. However, Decker's projected increase in net fixed assets is $240, and its projected increase in current assets is $15. Therefore, Decker's total projected financing needs are $240 + $15 = $255. Since Decker's projected financing surplus is less than its projected financing needs, Decker will have a financing deficit of $255 - $220 = $36.

Question 13

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.

Accepted Answer

This statement is true. Reviewing industry-average operating ratios is one of the initial steps in preparing forecasted financial statements for a firm. It helps to identify the areas where the firm needs to make adjustments to its operations and financial strategy to improve its financial position.

Question 14

Judd Enterprises
These are the simplified financial statements for Judd
Enterprises.
$\begin{array} { l r r } \text { Income statement } & \text { Current } & \text { Frojected } \ \text { Sales } & \text { na } & 1,000 \ \text { Costs } & \text { na } & \underline{720 }\ \text { Profit before tax } & \text { na } & 280 \ \text { Taxes } ( 25 \% ) & \text { na } & 70 \ \text { Net income } & \text { na } & 210 \ \text { Dividends } & \text { na } & 63 \end{array}$

$\begin{array} { l r r r r r } \text { Balance sheets } & \text { Current } & \text { Projected } && \text { Current } & \text { Projected } \ \text { Current assets } & 100 & 115 & \text { Current } & 70 & 81 \ \text { Net fixed assets } & 900 & 1,080& \text { liabilities } & \ & & & \text { Long-term debt } & 400 \ & & & \text { Common stock } & 300 \ & & & \text { Retained } & 230\&&&\text { earnings } \end{array}$  
-Refer to the Judd Enterprises financial statements.What is Judd's projected retained earnings under this plan?

Accepted Answer

The answer of Judd Enterprises
These are the simplified financial statements...

Question 15

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

Accepted Answer

Borrowing on its line of credit would provide Decker with additional funds, helping to cover a financing deficit.

Question 16

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

Since the firm is operating its fixed assets at full capacity, it cannot increase production without external financing. Additionally, if the dividend payout ratio is 100%, all earnings are distributed to shareholders, leaving no retained earnings for further investment in the business. Therefore, any growth in sales will require external financing to fund the necessary increase in production capacity.

Question 17

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

This statement is true. As sales increase, the firm's current assets, such as inventories, accounts receivable, and cash, also tend to increase. The firm may also have to increase its spontaneous liabilities, such as accounts payable and accruals, to fund these additional assets. This results in a reduction in additional funds needed (AFN) that the firm must raise externally to finance its growth.

Question 18

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

Retained earnings are the portion of a company's net income that is not distributed as dividends but is instead reinvested in the business or used to pay off debt. These retained earnings can be used as a source of funds for a firm's expansion, as long as the company does not pay out 100% of its earnings.

Question 19

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

To determine the amount of additional funds needed (AFN), you should subtract the sum of the expected increases in liabilities and retained earnings from the expected increase in assets. This is because assets and retained earnings represent uses of funds, while liabilities represent a source of funds.

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 rapid build-up of inventories typically requires additional financing because it ties up a company's cash flow and resources. Unless the increase is offset by a significant decrease in another asset, such as accounts receivable or investments, the company may need to seek external financing to cover the costs of holding and storing the extra inventory.

Quiz 12: Corporate Valuation and Financial Planning