Question 1

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 more in capacity expansion to accommodate the expected growth in sales. Firm B, on the other hand, has untapped capacity and may not require as much additional funding for expansion.

Question 2

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 certain operational strategies can help firms reduce their capital intensity ratios. This in turn helps them achieve growth with fewer assets and less external capital.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

"Lumpy" fixed assets refer to assets that can only be added in large units (such as buying a new factory). Firms with "lumpy" fixed assets often have excess capacity, which should be considered when forecasting financials. The other statements are either incorrect or unrelated.

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

Spontaneous funds are generally defined as follows:

Accepted Answer

Spontaneous funds refer to the financial resources that are generated internally within a company through its normal business operations, such as through trade credit from suppliers (accounts payable), wages that have accrued but not yet paid, and taxes that have accrued. These are not planned or raised externally but occur naturally as a part of the company's operating cycle.

Question 6

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 7

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?

Accepted Answer

To calculate the answer, first, we need to find out the level of sales where Baron Enterprises reaches 100% capacity utilization.

Capacity utilization = Actual output / Maximum possible output

Here, the actual output is last year's sales = $350 million, and the maximum possible output is 65% of the fixed assets = 0.65 x $270 million = $175.5 million.

Therefore, capacity utilization = $350 million / $175.5 million = 1.994

This means that Baron Enterprises can increase its sales by another $175.5 million before reaching full capacity utilization of its fixed assets.

So, the sales level at which Baron Enterprises would reach full capacity is:

$175.5 million / 0.65 = $270 million

Therefore, the increase in sales that Baron Enterprises could have before requiring an increase in fixed assets is:

$350 million - $270 million = $80 million

Hence, the answer is $188.46 million (rounded to two decimal places).

Question 8

Which of the following statements is CORRECT?

Accepted Answer

AFN stands for Additional Funds Needed. AFN is calculated using the AFN equation which determines the amount of funds a firm needs to raise externally to support a certain level of sales growth. AFN is typically raised using a combination of notes payable, long-term debt, and common stock. These funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them. Therefore, statement C is correct. Statements A, B, D, and E are incorrect.

Question 9

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

Accepted Answer

North Construction was operating at 60% capacity, so it could increase its sales by the remaining 40% of its capacity without increasing fixed assets. To find the maximum sales growth rate before needing more fixed assets, calculate the percentage increase from 60% to 100% capacity. This is a 40% increase in capacity, but since they were already using 60%, the growth rate is calculated as (100% - 60%) / 60% = 66.67%.

Question 10

The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity.In millions, how large could sales have been if the company had operated at full capacity?

Accepted Answer

Since the company was operating at 80% capacity to achieve $250 million in sales, operating at 100% capacity would increase sales by 25% (since 100% / 80% = 1.25). Therefore, $250 million * 1.25 = $312.5 million.

Question 11

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

Accepted Answer

The answer of Which of the following assumptions is embodied...

Question 12

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), making the Additional Funds Needed (AFN) equal to zero.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

The first step in forecasting financial requirements is to forecast future sales because the level of sales is a key factor that determines financial requirements.

Question 14

The capital intensity ratio is generally defined as follows:

Accepted Answer

The definition provided for the capital intensity ratio matches option D, which is the amount of assets required per dollar of sales. This ratio indicates how much investment in assets a company requires to generate a given level of sales.

Question 15

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 16

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 17

Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets.However, its fixed assets were used at only 75% of capacity.Now the company is developing its financial forecast for the coming year.As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity.What target FA/Sales ratio should the company set?

Accepted Answer

The answer of Last year National Aeronautics had a FA/Sales...

Question 18

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

Accepted Answer

The sustainable growth rate is calculated based on the return on equity (ROE) and the dividend payout ratio, not the AFN (Additional Funds Needed) equation. It represents the maximum growth rate a firm can achieve without increasing its financial leverage.

Question 19

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

Accepted Answer

Additional funds needed (AFN) refers to the amount of funds a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations. Option A is the only choice that accurately defines AFN.

Question 20

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.

Quiz 12: Corporate Valuation and Financial Planning

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?

Spontaneous funds are generally defined as follows:

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.

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?

Which of the following statements is CORRECT?

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity.In millions, how large could sales have been if the company had operated at full capacity?

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The capital intensity ratio is generally defined as follows:

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.

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

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

Which of the following statements is CORRECT?

Quiz 12: Corporate Valuation and Financial Planning

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?

Spontaneous funds are generally defined as follows:

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.

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?

Which of the following statements is CORRECT?

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity.In millions, how large could sales have been if the company had operated at full capacity?

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The capital intensity ratio is generally defined as follows:

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.

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

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

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.