Question 1

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

Accepted Answer

E

Question 2

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 under different operating plans is a necessary step in the financial planning process to analyze potential effects on profits and financial ratios.

Question 3

Based on the projections, Decker will have

Accepted Answer

Financing deficit = additional net financing = projected assets - projected liabilities and equity If financing deficit < 0 then instead, financing surplus = -financing deficit. Financing deficit = 1,555 - (81 + 360 + 500 + 650) = -36 so financing surplus = 36.

Question 4

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 5

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 6

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 funds generated from a firm's operations, such as accounts payable, accounts receivable, and inventory. A firm will try to use these funds to finance its activities as much as possible because this helps to minimize borrowing costs. However, there are some limitations to the use of spontaneous funds, such as credit terms with suppliers, contracts with workers, and tax laws. For example, if a firm has to pay its suppliers within 30 days, then it may not be able to use accounts payable to finance long-term investments. Similarly, if a firm has to pay its workers every two weeks, then it may not be able to use accounts receivable to pay for capital equipment that requires a large upfront payment. Tax laws can also limit the use of spontaneous funds by requiring firms to set aside funds for taxes owed.

Question 7

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 calculating AFN is: AFN = (increase in assets - increase in spontaneous liabilities - increase in retained earnings). Therefore, the expected increase in liabilities is not subtracted from the sum, but rather included in the overall calculation.

Question 8

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 statement is true. The higher the capital intensity ratio, the more assets a firm requires to generate a certain amount of sales, which leads to a greater need for capital investments.

Question 9

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...

Question 10

Judd Enterprises
These are the simplified financial statements for Judd
Enterprises.
$ \begin{array}{lcr}\text { Income statement } & \text { CurrentProjected } & \ \text { Sales } & \text { na } & 1,000 \ \text { Costs } & \text { na } & 700 \ \text { Profit before tax } & \text { na } & 300 \ \text { Taxes } & \text { na } & 90 \ \text { Net income } & \text { na } & 210 \ \text { Dividends } & \text { na } & 63\end{array} $

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

\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

Additional net financing = Projected assets - Projected liabilities and equity = 1,195 - (81 + 400 + 300 + (230 + 210 - 63)) = 37

Question 11

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 a firm with a positive net worth is operating its fixed assets at full capacity and has a dividend payout ratio of 100%, it cannot increase its dividend payout or sell additional equity to finance growth. Therefore, any increase in sales would require additional external financing to maintain constant financial ratios.

Question 12

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 increase, the firm's inventories generally increase, and purchases of inventories result in more accounts payable which reduces the need for additional funding. This is known as spontaneous liabilities.

Question 13

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 14

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 can be used as a source of funds for a firm's expansion if the firm does not pay out all of its earnings in dividends.

Question 15

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 16

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

Reviewing industry-average operating ratios relative to a firm's ratios is a common first step in forecasting financial statements. This helps identify areas where the firm may need to make adjustments to improve their financial performance.

Question 17

Judd Enterprises
These are the simplified financial statements for Judd
Enterprises.
$ \begin{array}{lcr}\text { Income statement } & \text { CurrentProjected } & \ \text { Sales } & \text { na } & 1,000 \ \text { Costs } & \text { na } & 700 \ \text { Profit before tax } & \text { na } & 300 \ \text { Taxes } & \text { na } & 90 \ \text { Net income } & \text { na } & 210 \ \text { Dividends } & \text { na } & 63\end{array} $

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

\end{array}$

-Refer to the Judd Enterprises financial statements. What is Judd's projected retained earnings under this planσ

Accepted Answer

Retained earnings = old retained earnings + new net income - new dividends = 230 + 210 - 63 = 377

Question 18

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

Accepted Answer

Consulting with key competitors about pricing strategies is not a typical step in the financial planning process. It may even be considered illegal and unethical as it could potentially violate antitrust laws. The other steps listed (monitoring operations, determining capital needs, developing forecasted financial statements, and forecasting funds) are all part of the financial planning process.

Question 19

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 funds that a firm must raise externally to support its projected growth. These funds can come from various external sources, including short-term bank loans, long-term bonds, preferred stock, and common stock. Therefore, the statement is true.

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

When there is a rapid build-up of inventories, it can tie up a company's cash flow and may require additional financing to cover the cost of the excess inventory. However, if there is an equally large decrease in some other asset, such as a reduction in accounts receivable, it can offset the need for additional financing.

Quiz 9: Corporate Valuation and Financial Planning