Question 1

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

Accepted Answer

Additional funds needed (AFN) refers to the funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations. Option A defines AFN correctly. Option B refers to the asset turnover ratio, Option C refers to the internal growth rate, Option D refers to the percent of sales method, and Option E refers to spontaneous funds.

Question 2

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

Accepted Answer

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

Question 3

AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time However, this assumption can be relaxed when we use the forecasted financial statement method Three conditions where constant ratios cannot be assumed are economies of scale, lumpy assets, and excess capacity.

Accepted Answer

The statement is correct, as the AFN equation assumes constant ratios of assets and liabilities to sales, which may not always hold true. The forecasted financial statement method allows for more flexibility in incorporating changes in ratios based on factors such as economies of scale, lumpy assets, and excess capacity.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock, which require explicit financing decisions to obtain them. This makes such funds non-spontaneous. Option A is incorrect because operating at below 100% of capacity in fixed assets will result in a lower AFN compared to operating with excess capacity. Option B is incorrect because even if a company retains all of its earnings, it may still need additional funds to support sales growth. Option D is incorrect because having a positive free cash flow does not necessarily mean that a company will not require additional funds to support sales growth. Option E is incorrect because accounts payable and accrued liabilities are sources of spontaneous financing and do not require explicit financing decisions like notes payable, long-term debt, and common stock.

Question 5

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, any increase in sales will require additional investment in fixed assets or working capital. On the other hand, Firm B has spare capacity and can increase its sales without needing significant additional investment. Therefore, Firm A is likely to need more additional funds than Firm B to achieve the same level of growth in sales.

Question 6

Which of the following statements is CORRECT?

Accepted Answer

Operating plans provide specific implementation guidance to help the firm meet its corporate objectives. These plans can be developed for any time horizon, but a 5-year horizon is commonly used by many companies. A firm's corporate purpose states the general philosophy of the business and provides broad direction, while the mission statement defines the lines of business and geographic areas of operation. The corporate scope is the overall set of strategic plans developed by the firm, and the statement of corporate strategies sets forth the broad approaches for achieving the firm's goals.

Question 7

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 a firm's capital intensity ratio (A0*/S0) decreases...

Question 8

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

To find the full capacity sales, divide the actual sales by the percentage of capacity used: $250 million / 0.8 = $312.5 million.

Question 9

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 that implement strategies such as just-in-time inventory systems, multiple shifts for labor, and outsourcing production can reduce their capital intensity ratios, which allows for achieving a given level of growth with fewer assets and less external capital.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

Firms whose fixed assets are "lumpy" (i.e., can only be added in large, discrete units as the company grows) often have excess capacity. This excess capacity should be taken into account in financial forecasting in order to accurately predict future financing needs. The other statements are either incorrect or incomplete.

Question 11

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

Accepted Answer

Consulting with key competitors about pricing is not a typical step in financial planning process. The other options listed are all common steps in the process.

Question 12

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 fact that long-term debt and common stock...

Question 13

capital intensity ratio is generally defined as follows:

Accepted Answer

Capital intensity ratio is the amount of assets required per dollar of sales, or A0*/S0.

Question 14

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), leading to an AFN (Additional Funds Needed) of zero.

Question 15

Spontaneous funds are generally defined as follows:

Accepted Answer

Spontaneous funds refer to the financial resources that a company generates automatically as a result of its day-to-day operations. These include increases in accounts payable and accrued expenses like wages and taxes, which do not require explicit action to be raised.

Question 16

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 using the formula: Return on Equity (ROE) multiplied by the retention ratio (1 - dividend payout ratio), not by using the AFN equation.

Question 17

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 find the answer, we can use the formula for calculating the maximum increase in sales without increasing fixed assets:
Maximum increase in sales = (100% - Capacity utilization rate) x Fixed assets
Maximum increase in sales = (100% - 65%) x $270 million = 35% x $270 million = $94.5 million
Therefore, Baron's sales could increase by $94.5 million before it is required to increase its fixed assets. Adding this to the previous year's sales gives us:
$350 million + $94.5 million = $444.5 million
So the correct answer is (C) $188.46, which is the closest option to $94.5 million.

Question 18

FMarston, Inchas developed a forecasting model to estimate its AFN for the upcoming year All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?

Accepted Answer

A sharp increase in forecasted sales would require the company to increase its production levels, leading to a need for more assets and therefore an increase in AFN. Option A would likely reduce the need for AFN since outsourcing production and utilizing just-in-time inventory can reduce the need for assets. Option B would also reduce the need for AFN since a lower dividend payout ratio means the company is retaining more earnings and therefore has more funds available for investment. Option C may or may not have an impact on AFN, as it depends on the specific terms of the deals and the company's payment schedule. Option D would likely reduce the need for AFN since excess capacity means the company doesn't need to invest in additional fixed assets.

Question 19

Which of the following is NOT a key element in strategic planning as it is described in the text?

Accepted Answer

The statement of cash flows is not a key element in strategic planning. It is a financial statement that shows changes in cash and cash equivalents during a specific period. Strategic planning involves identifying the direction and goals of the organization, and developing strategies and plans to achieve them. Key elements include the statement of the corporation's scope, the statement of corporate objectives, the corporation's strategies, and the mission statement.

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 9: Forecasting

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

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?

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.

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 statements is CORRECT?

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

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.

capital intensity ratio is generally defined as follows:

Which of the following statements is CORRECT?

Spontaneous funds are generally defined as follows:

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

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?

FMarston, Inchas developed a forecasting model to estimate its AFN for the upcoming year All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN) ?

Which of the following is NOT a key element in strategic planning as it is described in the text?

Which of the following statements is CORRECT?