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

If the firm's dividend payout ratio is 100%, it will not retain any earnings for future growth and will need to seek external financing to support any increase in sales. Furthermore, if fixed assets are already operating at full capacity, the firm may need to invest in additional fixed assets to support sales growth, further increasing its need for external financing.

Question 2

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 3

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

As sales grow, current assets tend to increase, which includes inventories and accounts payable, resulting in spontaneous liabilities that reduce AFN.

Question 4

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 5

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

This statement is true. A forecast of financial statements is an essential part of financial planning as it allows for the analysis of the impact of different operating procedures on profits and financial ratios.

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 debt/assets...

Question 7

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 profits that are not distributed as dividends but are instead reinvested in the business or kept as cash reserves. These retained earnings can then be used to finance the company's growth and expansion. Therefore, as long as a firm does not pay out all of its earnings as dividends, retained earnings serve as another source of funds for a firm's expansion.

Question 8

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

The answer of If a firm wants to maintain its...

Question 9

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

Since Firm A is already operating at full capacity, it will need to invest in additional capital to increase production and meet the expected growth in sales. On the other hand, Firm B can increase production without needing to invest as much in additional capital since it is operating below capacity. Therefore, Firm A is likely to need more additional funds than Firm B.

Question 10

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

When there is a rapid build-up of inventories, it may increase the current assets of the company. This increase in current assets needs to be financed, and if it is not matched by an equally large decrease in some other asset, additional financing will be required.

Question 11

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

The formula for determining the additional funds needed (AFN) is to subtract the projected increase in spontaneous liabilities and retained earnings from the projected increase in assets. Liabilities are not a source of funds, but rather a potential use of funds. Therefore, the statement in the question is false.

Question 12

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. An analysis of industry-average operating ratios compared to the firm's ratios can help identify areas where the company may need to make changes to improve its financial performance. This analysis is often a crucial step in preparing forecasted financial statements.

Question 13

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 14

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 stands for Additional Funds Needed, which implies that the firm needs to raise funds from external sources to finance its projected growth. Therefore, AFN typically comes from external sources such as short-term bank loans, long-term bonds, preferred stock, and common stock.

Question 15

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 is true. Firms can lower their capital intensity ratios through various techniques such as just-in-time inventory systems, multiple shifts of labor, and outsourcing production, allowing them to achieve a given level of growth with fewer assets and less external capital.

Question 16

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 capital (assets) is needed to generate a certain amount of sales. A higher ratio means that more assets are needed per dollar of sales, which can increase a company's capital requirements.

Question 17

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

The answer of The minimum growth rate that a firm...

Question 18

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 the current assets of a firm such as accounts receivable, inventory, and accounts payable. A firm will try to use these funds to finance their operations before seeking external financing. However, the usage of these funds may be limited due to factors such as credit terms with suppliers and tax obligations.

Question 19

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 AFN formula (Additional Funds Needed) takes into account changes in sales and capital intensity ratio (the amount of capital required per unit of sales). If the capital intensity ratio decreases as sales increase, it means that the firm is able to maintain its production with less capital, which would result in a lower AFN. Therefore, the use of the AFN formula is likely to overstate the amount of additional funds required, not understate it.

Question 20

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

The answer of Firms pay a low interest rate on...

Quiz 12: Corporate Valuation and Financial Planning