Question 1

A firm's maximum sustainable sales growth rate occurs at a retention ratio of 100%.

Accepted Answer

When the retention ratio (or retention rate) is 100%, it means that the firm is retaining all of its earnings and not distributing any as dividends. This allows the firm to reinvest all of its earnings back into the business, which can lead to higher earnings and sales growth. As a result, the firm's maximum sustainable sales growth rate can occur at a retention ratio of 100%.

Question 2

Financial capital needed (FCN)is the amount of funds needed to acquire assets necessary to support a firm's sales growth.

Accepted Answer

Financial capital needed (FCN) refers to the amount of money a company needs to invest in fixed assets such as property, plant, and equipment to support its projected sales growth. This capital expenditure will enable the company to increase its production capacity, improve efficiency, and meet customer demand for its products or services.

Question 3

Sales forecasting accuracy is usually lowest during a venture's development stage in its life cycle.

Accepted Answer

During the development stage, there is limited historical data to base sales forecasts on, and there may be high levels of uncertainty and volatility in the market. As a result, sales forecasting accuracy tends to be lower during this stage compared to the later stages of a venture's life cycle.

Question 4

The cost of obtaining additional funds, such as additional interest expenses from borrowing funds, may be explicit and impact AFN.

Accepted Answer

Borrowing funds typically involves paying interest expenses, which are a direct cost of obtaining additional funds. These expenses can impact the AFN calculation, as they increase the amount of financing needed to support the company's growth.

Question 5

In a typical venture's life cycle, the rapid-growth stage involves creating and building value, obtaining additional financing, and examining exit opportunities.

Accepted Answer

The rapid-growth stage is indeed about creating and building value, obtaining additional financing, and examining exit opportunities.

Question 6

Long-term financial planning begins with a forecast of annual working capital needs.

Accepted Answer

Long-term financial planning typically begins with a forecast of sales or revenues, which then informs other financial projections, including working capital needs.

Question 7

Internally generated funds is the cash produced from operating a firm over a specified time period.

Accepted Answer

The answer of Internally generated funds is the cash produced...

Question 8

The sustainable sales growth rate is equal to ROA times the retention ratio.

Accepted Answer

The sustainable sales growth rate is actually determined by the return on equity (ROE) times the retention ratio, not the return on assets (ROA).

Question 9

Public or seasoned financing typically occurs during the survival stage of a venture's life cycle.

Accepted Answer

Public or seasoned financing usually occurs during the later stages of a venture's life cycle, such as the expansion or maturity stage. During the survival stage, the focus is on obtaining seed or start-up funding to keep the venture afloat.

Question 10

Additional funds needed (AFN)is the gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings.

Accepted Answer

This statement is true. Additional funds needed (AFN) refers to the additional financial capital that a company needs beyond the funds it generates internally (spontaneously generated funds) and retained earnings.

Question 11

The volatility of a firm's cash balance will steadily decrease as the firm progresses from the survival stage to the rapid-growth stage.

Accepted Answer

During the rapid-growth stage, a firm often experiences increased volatility in its cash balance due to significant investments in resources, expansion efforts, and potentially uneven revenue streams as it scales up operations.

Question 12

The added costs associated with obtaining equity capital are based on investor expected rates of return and are explicit costs which affect AFN.

Accepted Answer

The added costs associated with obtaining equity capital are implicit costs related to the expected rates of return by investors, not explicit costs. These costs affect the Additional Funds Needed (AFN) indirectly through the cost of new equity, rather than being direct, out-of-pocket expenses.

Question 13

Sales forecasting accuracy is usually highest during a venture's startup stage in its life cycle.

Accepted Answer

Sales forecasting accuracy tends to be lower in the startup stage because there is limited historical data and uncertainty about market demand. Accuracy typically improves as the venture gains more data and experience.

Question 14

Forecasting for firms with operating histories is generally much easier than forecasting for early-stage ventures.

Accepted Answer

Firms with operating histories have past financial and performance data to analyze and use for forecasting, while early-stage ventures do not have this historical data, making forecasting more difficult and uncertain.

Question 15

The rate at which a firm can grow sales based on the retention of business profits is known as the sustainable sales growth rate.

Accepted Answer

The sustainable sales growth rate is the rate at which a firm can grow sales based on the retention of business profits.

Question 16

First-round financing usually occurs during a venture's rapid-growth life cycle stage.

Accepted Answer

First-round financing typically occurs during the early stages of a venture's development, not during the rapid-growth phase. This is when a startup is trying to establish its business model, develop its product, and gain initial traction.

Question 17

When using the beginning-of-period equity base, the sustainable sales growth rate is equal to ROE times the retention ratio.

Accepted Answer

This is the formula for the sustainable sales growth rate using the beginning-of-period equity base.

Question 18

A customer-driven or "bottom-up" approach to forecasting sales is used primarily to forecast industry sales growth rates.

Accepted Answer

A customer-driven or "bottom-up" approach to forecasting sales involves gathering data from individual customers or market segments to estimate sales for each one, and then aggregating these estimates to arrive at a total sales forecast. This approach is primarily used to forecast a company's own sales, rather than industry sales growth rates. Industry sales growth rates are typically forecasted using a top-down approach, which involves analyzing macroeconomic and industry-level data to estimate overall industry performance.

Question 19

Sales forecasts usually are based on either a single specific scenario or weighted averages of several possible realizations.

Accepted Answer

Sales forecasts can be based on a single specific scenario or a weighted average of multiple scenarios to account for different possibilities and uncertainties.

Question 20

The weighted average of a set of possible outcomes or scenarios is known as the expected value.

Accepted Answer

This is correct. The expected value is calculated by multiplying each outcome by its probability of occurrence, and then summing these products.

Quiz 9: Projecting Financial Statements