Question 1

Which of the following statements is CORRECT?

Accepted Answer

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. Choices A, B, D, and E are incorrect because they are either inconsistent with the AFN equation or not universally true.

Question 2

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. $$\begin{array} { l c c } 
\text { Last year's sales } = \mathrm { S } _ { 0 } & \$ 350& \text { Last year's accounts payable } & \$ 40 \
\text { Sal es growth rate } = \mathrm { g } & 30 \% &\text { Last year's notes payable } & \$ 50 \
\text { Last year's total assets } = \mathrm { An } ^ { * } & \$ 500 &\text { Last year's accruals } & \$ 30 \
\text { Last year's profit margin = PM } & 5 \%& \text { Target payout ratio } & 60 \%
\end{array}$$

Accepted Answer

The answer of Daniel Sawyer, the CEO of the Sawyer...

Question 3

Which of the following statements is CORRECT?

Accepted Answer

Forecasting future sales is the first step in forecasting financial requirements because it provides the basis for estimating other financial variables, such as expenses and capital expenditures. The other statements are incorrect. Forecasted financial statements are used for a variety of purposes, not just as a part of managerial compensation programs. The capital intensity ratio is used to measure how much fixed assets a company has in relation to its sales, not the physical condition of those assets. The AFN equation and the forecasted financial statement method are two approaches to forecasting financial requirements, and the AFN equation is not necessarily more accurate than the forecasted financial statement method; the choice of which method to use depends on the specifics of the company and the forecasting problem. Finally, while determining the breakdown of common equity between common stock and retained earnings is important, it is not necessarily the most important step in developing forecasted financial statements.

Question 4

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

The answer of A company expects sales to increase during...

Question 5

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

The answer of If a firm's capital intensity ratio (A₀*/S₀)...

Question 6

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

The answer of A firm's profit margin is 5%, its...

Question 7

Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital.For example, just-in-time inventory systems, multiple shifts for labor, and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.

Accepted Answer

The statement correctly describes how firms can reduce their capital intensity ratio and achieve growth with fewer assets and less external capital.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

The sustainable growth rate is indeed the maximum growth rate a firm can achieve without needing to secure external financing, assuming it maintains a constant dividend payout ratio, business operations efficiency, and financial policy. This means the firm can grow at this rate with its internally generated funds (retained earnings), leading to an AFN (Additional Funds Needed) of zero.

Question 9

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 sharp increase in forecasted sales will require more assets to support the increased sales volume, thereby leading to an increase in AFN. The other options are likely to decrease AFN. A just-in-time inventory system and outsourcing production decrease inventory and fixed assets, reducing AFN. A reduction in dividend payout ratio decreases the need for financing, reducing AFN. Switching to a supplier that offers a longer credit period increases accounts payable, which reduces AFN. Discovering excess capacity in fixed assets reduces the need for additional fixed asset investments, reducing AFN.

Question 10

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

Accepted Answer

Additional funds needed (AFN) refers to funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations. Option B is referring to the asset turnover ratio, Option C is referring to free cash flow, Option D is referring to the percent of sales method, and Option E is referring to spontaneous funds.

Question 11

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. $$\begin{array} { l l l } 
\text { Last year's sales } = \mathrm { S } _ { 0 } & \$ 300.0 \text { Last year's accounts payable } & \$ 50.0 \
\text { Sal es growth rate } = \mathrm { g } & 40 \% \text { Last year's notes payable } & \$ 15.0 \
\text { Last year's total assets } = \mathrm { A } _ { 0 } ^ { * } & \$ 500.0 \text { Last year's accruals } & \$ 20.0 \
\text { Last year's profit margin = PM } & 20.0 \% \text { Initial payout ratio } & 10.0 \%
\end{array}$$

Accepted Answer

The answer of You have been asked to forecast the...

Question 12

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

Firm A, which is operating at full capacity, may need additional funds to expand its production capacity to meet the expected growth in sales. On the other hand, Firm B may be able to meet the expected growth in sales without requiring additional funds for expanding its production capacity as it is not operating at full capacity.

Question 13

Spontaneous funds are generally defined as follows:

Accepted Answer

Spontaneous funds refer to the financial resources that a company generates automatically as a result of its day-to-day operations. These include increases in accounts payable and accrued expenses like wages and taxes, which do not require explicit action to be raised.

Question 14

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

Accepted Answer

Accounts payable and accruals are often assumed to vary directly with sales in the AFN equation, as they are part of the spontaneous liabilities that increase with sales.

Question 15

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

The statement accurately describes the conditions where constant ratios cannot be assumed and the need for the forecasted financial statement method.

Question 16

The capital intensity ratio is generally defined as follows:

Accepted Answer

The capital intensity ratio is defined as the amount of assets required per dollar of sales, or A₀*/S₀. Therefore, choice D is the correct answer.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A negative AFN (Additional Funds Needed) suggests that the company has more than enough internal financing (through retained earnings and spontaneous liabilities) to fund its new asset requirements, indicating no need for external financing.

Question 18

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? $\begin{array}{lcc}
\text { Last year's sales }=\mathrm{S}_{0} & \$ 200,000 \text { Last year's accounts payable } & \$ 50,000 \
\text { Sales growth rate }=\mathrm{g} & 40 \% \text { Last year's notes payable } & \$ 15,000\
\text { Last year's total assets }=\mathrm{A}_{0} * & \$ 135,000 \text { Last year's accruals } & \$ 20,000 \
\text { Last year's profit margin }=\mathrm{PM} & 20.0 \% \text { Target payout ratio } & 25.0 \text { \% }
\end{array}$

Accepted Answer

The answer of In your internship with Lewis, Lee, &...

Question 19

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

Companies can implement strategies such as improving asset turnover, outsourcing, or adopting more efficient technologies to lower their asset requirements and reduce the need for external financing.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

Firms with "lumpy" fixed assets may have excess capacity, which can affect their financial forecasting process. The other statements are either incorrect or do not provide enough information to determine their accuracy.

Quiz 12: Corporate Valuation and Financial Planning

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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?

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.

Which of the following statements is CORRECT?

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) ?

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

Spontaneous funds are generally defined as follows:

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

The capital intensity ratio is generally defined as follows:

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

Quiz 12: Corporate Valuation and Financial Planning

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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?

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.

Which of the following statements is CORRECT?

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) ?

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

Spontaneous funds are generally defined as follows:

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

The capital intensity ratio is generally defined as follows:

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

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.