(17-5) Forecasting financial reqs. C K Answer: c MEDIUM/
A) When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A*0/S0 and L*0/S0) vary from year to year in a stable, predictable manner.
B) When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.
C) Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process.
D) For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.
E) Regression techniques cannot be used in situations where excess capacity or economies of scale exist.

Question

Quizplus · Accepted Answer

This statement is true as firms with lumpy fixed assets (assets added in large, discrete units) often have excess capacity which needs to be considered while forecasting financial requirements. Option A and B are incorrect as they discuss the assumptions made while using the AFN (additional funds needed) equation. Option D and E are also incorrect as they are not related to the topic discussed in the question.

(17-5) Forecasting Financial Reqs