Question 1

Which of the following statements is CORRECT?
A) Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
B) The first,and perhaps the most critical,step in forecasting financial requirements is to forecast future sales.
C) Forecasted financial statements,as discussed in the text,are used primarily as a part of the managerial compensation program,where management's historical performance is evaluated.
D) The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.
E) The AFN equation produces more accurate forecasts than the forecasted financial statement method,especially if fixed assets are lumpy and economies of scale exist.

Accepted Answer

Forecasting future sales is critical because it serves as the basis for determining the firm's future financial requirements, which then lead to the development of forecasted financial statements. The other statements are either incorrect or incomplete.

Question 2

Which of the following statements is CORRECT? A) When we use the AFN equation,we assume that the ratios of assets and liabilities to sales (A₀^*/S₀ and L₀^*/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.

Accepted Answer

The answer of Which of the following statements is CORRECT?
A)...

Question 3

Last year Godinho Corp.had $420 million of sales,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?
A) $551.3
B) $462.0
C) $509.3
D) $656.3
E) $525.0

Accepted Answer

11ea856c_8b34_d8ce_9aec_1f35b9ea2008_TB1222_00 ?
Full capacity sales = Actual sales / % of capacity used = $525.0
?

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?
A) The company previously thought its fixed assets were being operated at full capacity,but now it learns that it actually has excess capacity.
B) The company increases its dividend payout ratio.
C) The company begins to pay employees monthly rather than weekly.
D) The company's profit margin increases.
E) The company decides to stop taking discounts on purchased materials.

Accepted Answer

The answer of A company expects sales to increase during...

Question 5

Fairchild Garden Supply expects $700 million of sales this year,and it forecasts a 15% increase for next year.The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.25(Sales).All dollars are in millions.What is the projected inventory turnover ratio for the coming year?
A) 2.78 times
B) 2.82 times
C) 4.35 times
D) 3.79 times
E) 3.48 times

Accepted Answer

11ea856c_8b36_d4a4_9aec_a3dda2304485_TB1222_00 ?
Inventory turnover ratio = Sales / Inventories = 3.48 times
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Question 6

Chua Chang & Wu Inc.is planning its operations for next year,and the CEO wants you to forecast the firm's additional funds needed (AFN).Data for use in your forecast are shown below.Based on the AFN equation,what is the AFN for the coming year? $\begin{array}{llll}
\text { Last year's sales }=\mathrm{S}_{0} & \$ 200,000 & \text { Last year's accounts payable } &\$ 50,000 \
\text { Sal es growth rate }=\mathrm{g} & 40 \% & \text { Last year's notes payable } & \$ 15,000 \
\text { Last year's total assets }=\mathrm{A}_{0} * & \$ 127,500 & \text { Last year's accruals } & \$ 20,000 \
\text { Last year's profit margin }=\mathrm{PM} & 20.0 \% & \text { Target payout ratio } & 25.0 \%
\end{array}$
?
A) -$14,820
B) -$23,180
C) -$19,000
D) -$21,280
E) -$20,520

Accepted Answer

The answer of Chua Chang & Wu Inc.is planning its...

Question 7

Which of the following statements is CORRECT?
A) Once a firm has defined its purpose,scope,and objectives,it must develop a strategy or strategies for achieving its goals.The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals.
B) A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
C) Operating plans provide management with detailed implementation guidance,consistent with the corporate strategy,to help meet the corporate objectives.These operating plans can be developed for any time horizon,but many companies use a 5-year horizon.
D) A firm's mission statement defines its lines of business and geographic area of operations.
E) The corporate scope is a condensed version of the entire set of strategic plans.

Accepted Answer

Operating plans provide specific guidance for achieving the corporate objectives and are developed for a specific time horizon, often 5 years. The statement of corporate strategies sets forth broad approaches for achieving a firm's goals and is not detailed plans. The corporate purpose states the general philosophy of the business but does not provide specific operational objectives. The mission statement defines what the firm does and where it operates, while the corporate scope is the overall range of the firm's activities.

Question 8

Which of the following is NOT one of the steps taken in the financial planning process?
A) Assumptions are made about future levels of sales,costs,and interest rates for use in the forecast.
B) The entire financial plan is reexamined,assumptions are reviewed,and the management team considers how additional changes in operations might improve results.
C) Projected ratios are calculated and analyzed.
D) Develop a set of projected financial statements.
E) Consult with key competitors about the optimal set of prices to charge,i.e. ,the prices that will maximize profits for our firm and its competitors.

Accepted Answer

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

Question 9

Howton & Howton Worldwide (HHW)is planning its operations for the coming year,and the CEO wants you to forecast the firm's additional funds needed (AFN).Data for use in the forecast are shown below.However,the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%,which the firm's investment bankers have recommended.Based on the AFN equation,by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. $\begin{array}{llll}
\text { Last year's sales }=\mathrm{S}_{0} & \$ 300 & \text { Last year's accounts payable } & \$ 50 \
\text { Sal es growth rate }=\mathrm{g} & 40 \% & \text { Last year's notes payable } & \$ 15 \
\text { Last year's total assets }=\mathrm{A}_{0}{ }^{2} & \$ 500 & \text { Last year's accruals } & \$ 20 \
\text { Last year's profit margin = PM } &20 \% & \text { Initi al payout ratio } & 10 \% \
& & \text { New payout ratio } & 50 \%
\end{array}$
?
A) $28.2
B) $33.6
C) $26.9
D) $30.9
E) $25.5

Accepted Answer

The change in the payout ratio affects the retained earnings, which in turn affects the Additional Funds Needed (AFN). With a higher payout ratio, the firm retains less earnings, increasing its need for external financing. The calculation involves determining the increase in retained earnings due to the change in payout ratio and how this affects the AFN. Given the profit margin (PM) of 20% on last year's sales (S0) of $300 million, the net income is $60 million. Changing the payout ratio from 10% to 50% decreases retained earnings, which are part of the internally generated funds that reduce the AFN. The difference in retained earnings is 40% of $60 million, or $24 million, which would have been retained within the company but now will be paid out, thus increasing the AFN by this amount. However, the specific calculation to reach the exact number provided in the options requires additional information not provided in the user's question, such as the precise formula for AFN and how the initial conditions are applied. The correct answer, based on the information given and typical AFN calculations, would involve understanding that a higher payout ratio means less retained earnings and thus a higher AFN, but the exact figure (B) $33.6 million, suggests a specific calculation that accounts for the growth and financial policies of the firm.

Question 10

Clayton Industries is planning its operations for next year.Ronnie Clayton,the CEO,wants you to forecast the firm's additional funds needed (AFN).Data for use in your forecast are shown below.Based on the AFN equation,what is the AFN for the coming year? Dollars are in millions. $\begin{array}{lrlr}
\text { Last year's sales }=\mathrm{S}_{0} & \$ 350 & \text { Last yr's accounts payable } & \$ 40 \
\text { Sales growth rate }=\mathrm{g} & 30 \% & \text { Last yr's notes payable } & \$ 50 \
\text { Last year's total assets }=\mathrm{A}_{0}{ }^{*} & \$ 360 & \text { Last yr's accruals } & \$ 30 \
\text { Last year's prof margin }=\mathrm{PM} & 5 \% & \text { Target payout ratio } & 60 \%
\end{array}$
?
A) $67.0
B) $78.7
C) $63.9
D) $77.9
E) $91.1

Accepted Answer

The answer of Clayton Industries is planning its operations for...

Question 11

Kamath-Meier Corporation's CFO uses this equation,which was developed by regressing inventories on sales over the past 5 years,to forecast inventory requirements: Inventories = $22.0 + 0.125(Sales).The company expects sales of $275.0 million during the current year,and it expects sales to grow by 30% next year.What is the inventory forecast for next year? All dollars are in millions.
A) $59.4
B) $60.0
C) $54.7
D) $66.7
E) $82.0

Accepted Answer

11ea856c_8b35_26ef_9aec_5bf2d82bb15a_TB1222_00 11ea856c_8b35_26f0_9aec_1179aab0de41_TB1222_00 ?
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Question 12

Which of the following statements is CORRECT?
A) Since accounts payable and accrued liabilities must eventually be paid off,as these accounts increase,AFN as calculated by the AFN equation must also increase.
B) Suppose a firm is operating its fixed assets at below 100% of capacity,but it has no excess current assets.Based on the AFN equation,its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
C) If a firm retains all of its earnings,then it cannot require any additional funds to support sales growth.
D) Additional funds needed (AFN)are typically raised using a combination of notes payable,long-term debt,and common stock.Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
E) If a firm has a positive free cash flow,then it must have either a zero or a negative AFN.

Accepted Answer

D) Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. These sources of funds are considered non-spontaneous because they require explicit financing decisions by the firm's management.

Question 13

Last year Handorf-Zhu Inc.had $850 million of sales,and it had $425 million of fixed assets that were used at only 85% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?
A) 16.94%
B) 17.47%
C) 19.06%
D) 18.88%
E) 17.65%

Accepted Answer

11ea856c_8b35_ea42_9aec_73f0ad0ed9b6_TB1222_00 ?
Percent growth in sales = Additional sales / Old sales = 17.65%
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Question 14

Which of the following statements is CORRECT?
A) Any forecast of financial requirements involves determining how much money the firm will need,and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.
B) The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet.Although a forecasted income statement may help clarify the results,income statement data are not essential because funds needed relate only to the balance sheet.
C) Dividends are paid with cash taken from the accumulated retained earnings account,hence dividend policy does not affect the AFN forecast.
D) A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed.
E) If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales,then the AFN method will provide more accurate forecasts than the projected financial statement method.

Accepted Answer

A negative AFN (Additional Funds Needed) suggests that the company has more than enough internal financing (through retained earnings and spontaneous financing) to support its growth, meaning it does not need to seek external financing for its additional assets.

Question 15

Last year Jain Technologies had $250 million of sales and $100 million of fixed assets,so its Fixed Assets/Sales ratio was 40%.However,its fixed assets were used at only 40% 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 Fixed Assets/Sales ratio should the company set?
A) 19.0%
B) 14.6%
C) 16.0%
D) 15.4%
E) 14.2%

Accepted Answer

11ea856c_8b36_5f73_9aec_e7be288309af_TB1222_00 ?
Target FA/Sale ratio = Actual FA/Full capacity sales = 16.0%

Question 16

Last year Emery Industries had $450 million of sales and $225 million of fixed assets,so its Fixed Assets/Sales ratio was 50%.However,its fixed assets were used at only 65% of capacity.If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity,with sales held constant at $450 million,how much cash (in millions)would it have generated?
A) $66.94
B) $78.75
C) $63.00
D) $74.81
E) $75.60

Accepted Answer

11ea856c_8b39_6cbc_9aec_bb7123aa87ba_TB1222_00

Question 17

Which of the following statements is CORRECT?
A) The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds.In other words,it is the growth rate at which the firm's AFN equals zero.
B) If a firm's assets are growing at a positive rate,but its retained earnings are not increasing,then it would be impossible for the firm's AFN to be negative.
C) If a firm increases its dividend payout ratio in anticipation of higher earnings,but sales and earnings actually decrease,then the firm's actual AFN must,mathematically,exceed the previously calculated AFN.
D) Higher sales usually require higher asset levels,and this leads to what we call AFN.However,the AFN will be zero if the firm chooses to retain all of its profits,i.e. ,to have a zero dividend payout ratio.
E) Dividend policy does not affect the requirement for external funds based on the AFN equation.

Accepted Answer

The sustainable growth rate is the maximum growth rate that a firm can achieve without having to issue new equity or debt. This means that the firm's AFN (additional funds needed) would be zero at this growth rate, and it would be able to finance its growth using only internal funds.

Question 18

Last year Wei Guan Inc.had $625 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity.In millions,by how much could Wei Guan's sales increase before it is required to increase its fixed assets?
A) $316.35
B) $302.88
C) $289.42
D) $400.48
E) $336.54

Accepted Answer

11ea856c_8b35_9c21_9aec_d93065327e22_TB1222_00 ?
Additional sales without adding FA = Full capacity sales - Actual sales = $336.54

Question 19

Spontaneously generated funds are generally defined as follows:
A) Assets required per dollar of sales.
B) A forecasting approach in which the forecasted percentage of sales for each item is held constant.
C) Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.
D) Funds that arise out of normal business operations from its suppliers,employees,and the government,and they include spontaneous increases in accounts payable and accruals.
E) The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth.

Accepted Answer

Spontaneously generated funds are funds that arise out of normal business operations from its suppliers, employees, and the government, and they include spontaneous increases in accounts payable and accruals. Option A refers to the asset turnover ratio, Option B refers to the forecasting method of constant percentage of sales, Option C refers to external financing, and Option E refers to the calculation of free cash flow.

Quiz 17: Financial Planning and Forecasting

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Last year Godinho Corp.had $420 million of sales,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?

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?

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Last year Handorf-Zhu Inc.had $850 million of sales,and it had $425 million of fixed assets that were used at only 85% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Last year Wei Guan Inc.had $625 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity.In millions,by how much could Wei Guan's sales increase before it is required to increase its fixed assets?

Spontaneously generated funds are generally defined as follows: