Question 1

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 2

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, economies of scale exist, or if excess capacity exists.

Accepted Answer

Forecasting future sales is the first and most critical step in forecasting financial requirements, as it drives the need for assets and financing.

Question 3

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 management with detailed implementation guidance for achieving the corporate objectives, and they are developed consistent with the corporate strategy. These plans can be developed for any timeframe, but some organizations use a 5-year horizon.

Question 4

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

If the capital intensity ratio decreases as sales increase, it means that the firm is becoming more efficient in its use of capital. Therefore, the firm may not require as much additional financing as predicted by the AFN formula, leading to an overstatement of the amount of additional funds required, rather than an understatement.

Question 5

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

Firm A is already operating at full capacity, so in order to accommodate for the expected growth in sales, it will need to invest in additional capital to increase its production capacity. On the other hand, Firm B has spare capacity and can increase its production without immediately requiring additional funds for capital investment.

Question 6

Which of the following statements is CORRECT?
A) The tax code encourages companies to pay dividends rather than retain earnings.
B) If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
C) The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
D) Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk.

Accepted Answer

Large stock repurchases financed by debt can increase earnings per share by reducing the number of shares outstanding, but they also increase the firm's financial risk due to the added debt burden.

Question 7

The 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 accurately describes the conditions where the constant ratio assumption of the AFN equation cannot be applied.

Question 8

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 can adopt various strategies to reduce their capital intensity ratios and achieve growth with fewer assets and less external capital, such as just-in-time inventory systems, outsourcing production, and multiple labor shifts.

Question 9

Jefferson City Computers has 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)? A) A sharp increase in its forecasted sales. B) A switch to a just-in-time inventory system and outsourcing production. C) The company reduces its dividend payout ratio. D) The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35. E) The company discovers that it has excess capacity in its fixed assets.

Accepted Answer

A sharp increase in forecasted sales would likely increase the AFN because higher sales typically require more assets, such as inventory and receivables, which in turn require additional financing.

Question 10

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

Increasing the dividend payout ratio reduces the amount of retained earnings, which increases the need for external financing, thus increasing the AFN.

Question 11

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

Question 12

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 liabilities are far more than sufficient to finance the additional assets needed.
E) If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method.

Accepted Answer

A negative AFN indicates that the firm has more than enough internal financing (retained earnings and spontaneous liabilities) to cover its additional asset needs, meaning no external financing is required.

Question 13

Which of the following assumptions is embodied in the AFN equation?
A) None of the firm's ratios will change.
B) Accounts payable and accruals are tied directly to sales.
C) Common stock and long-term debt are tied directly to sales.
D) Fixed assets, but not current assets, are tied directly to sales.
E) Last year's total assets were not optimal for last year's sales.

Accepted Answer

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

Question 14

The term "additional funds needed (AFN)" is generally defined as follows:
A) Funds that are obtained automatically from routine business transactions.
B) Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
C) The amount of assets required per dollar of sales.
D) The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
E) A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.

Accepted Answer

Additional funds needed (AFN) refers to the funds that a firm needs to raise externally from non-spontaneous sources, such as issuing new debt or equity, to support its operations when its projected internal financial resources are insufficient. The other options do not accurately describe the definition of AFN.

Question 15

Which of the following is NOT a key element in strategic planning as it is described in the text? A) The mission statement. B) The statement of the corporation’s scope. C) The statement of cash flows. D) The statement of corporate objectives. E) The corporation's strategies.

Accepted Answer

The statement of cash flows is a financial document that details the inflow and outflow of cash within a company, and it is not typically considered a key element of strategic planning, which focuses more on the mission, scope, objectives, and strategies of the corporation.

Question 16

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) There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases. The Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship.
Problems

Accepted Answer

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

Question 17

Last year Godinho Corp. had $250 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) $312.5
B) $328.1
C) $344.5
D) $361.8
E) $379.8

Accepted Answer

The answer of Last year Godinho Corp. had $250 million...

Question 18

Spontaneous 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 short-term or long- term borrowing and/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 immediate increases in accounts payable, accrued wages, and accrued taxes.
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

Spontaneous funds are those that arise naturally from a firm's normal business operations, such as accounts payable, accrued wages, and accrued taxes, without the need for external financing.

Question 19

Which of the following is NOT one of the steps taken in the financial planning process? A) Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised. B) Monitor operations after implementing the plan to spot any deviations and then take corrective actions. C) Determine the amount of capital that will be needed to support the plan. D) Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios. 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 competitors about pricing is not a legitimate step in financial planning and could violate antitrust laws.

Question 20

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 g.

Accepted Answer

The answer of The minimum growth rate that a firm...

Quiz 12: Financial Planning and Forecasting Financial Statements

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.

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

Jefferson City Computers has 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) ?

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 statements is CORRECT?

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

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

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?

Last year Godinho Corp. had $250 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?

Spontaneous funds are generally defined as follows:

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

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 g.