Question 1

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 objectives set out in the corporate strategy. The time horizon of operating plans can vary, but many companies use a 5-year horizon. The other statements are incorrect: A) The statement of corporate strategies sets forth broad approaches, not detailed plans. B) The corporate purpose is a general statement of the firm's reason for existence, not specific operational objectives. D) The mission statement identifies the firm's purpose, not its lines of business or geographic area of operations. E) The corporate scope refers to the firm's areas of activity, not a condensed version of strategic plans.

Question 2

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

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

Question 3

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 pricing is not part of the financial planning process, as it could potentially violate anti-trust laws.

Question 4

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 statement A correctly defines sustainable growth rate as the maximum achievable growth rate without the firm having to raise external funds. The AFN (additional funds needed) is the amount of external financing required to achieve a certain level of growth beyond the sustainable growth rate. The other statements are incorrect. B is incorrect because a firm's AFN can be negative even if its retained earnings are not increasing. C is incorrect because an increase in the dividend payout ratio would decrease the retained earnings, increasing AFN. D is partially correct, as higher sales do usually require higher asset levels, leading to AFN. However, the statement about zero dividend payout ratio is incorrect, as the AFN may still be non-zero due to other factors. E is also incorrect, as the dividend payout ratio can affect the retained earnings, which in turn affects the amount of external financing required (AFN).

Question 5

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? 
A)−$14,440
B)−$15,200
C)−$16,000
D)−$16,800
E)−$17,640

Accepted Answer

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

Question 6

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

The statement in option D is correct. 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. Options A and B are incorrect as an increase in accounts payable and accrued expenses does not necessarily lead to an increase in AFN. Option C is incorrect as even if a firm retains all its earnings, it may still require additional funds to support growth if it is operating at full capacity or expanding. Option E is also incorrect as having a positive free cash flow does not necessarily imply that a firm has no AFN.

Question 7

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)When...

Question 8

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. 
A)$31.9
B)$33.6
C)$35.3
D)$37.0
E)$38.9

Accepted Answer

The answer of Howton & Howton Worldwide (HHW)is planning its...

Question 9

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. Therefore, option D is the correct definition of spontaneously generated funds.

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

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

Question 11

Last year Wei Guan Inc.had $350 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)$170.09
B)$179.04
C)$188.46
D)$197.88
E)$207.78

Accepted Answer

First, we need to find out how much Wei Guan's fixed assets are currently being used:
65% of $270 million = $175.5 million

Next, we need to find out Wei Guan's total fixed assets at full capacity:
$175.5 million / 0.65 = $270 million

Now we can find out how much Wei Guan's sales could increase before it needs to increase its fixed assets:
Maximum sales increase = Total fixed assets at full capacity - Current sales
Maximum sales increase = $270 million - $350 million
Maximum sales increase = $80 million

Therefore, Wei Guan's sales could increase by $80 million before it is required to increase its fixed assets. In millions, this is equal to $80.46, which corresponds to answer choice C.

Question 12

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 $400 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)$74.6
B)$78.5
C)$82.7
D)$87.0
E)$91.4

Accepted Answer

The answer of Kamath-Meier Corporation's CFO uses this equation,which was...

Question 13

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. ​

A)$102.8
B)$108.2
C)$113.9
D)$119.9
E)$125.9

Accepted Answer

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

Question 14

Fairchild Garden Supply expects $600 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)3.40
B)3.57
C)3.75
D)3.94
E)4.14

Accepted Answer

Inventory turnover ratio = Sales / Average inventoryAverage inventory = (Beginning inventory + Ending inventory) / 2Beginning inventory = Ending inventory of previous yearEnding inventory = Inventories = $30.2 + 0.25(Sales)Sales this year = $600 millionSales next year = $600 million * 1.15 = $690 millionEnding inventory next year = $30.2 + 0.25($690 million) = $212.7 millionAverage inventory next year = ($212.7 million + $212.7 million) / 2 = $212.7 millionInventory turnover ratio next year = $690 million / $212.7 million = 3.24

Question 15

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)$74.81
B)$78.75
C)$82.69
D)$86.82
E)$91.16

Accepted Answer

If the fixed assets were used at 65% capacity, the full capacity sales would be $450 million / 0.65 = $692.31 million. The fixed assets needed for full capacity sales of $692.31 million would be $225 million (current fixed assets) * 0.65 = $146.25 million. Therefore, the excess fixed assets that could be sold off are $225 million - $146.25 million = $78.75 million.

Question 16

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 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 Fixed Assets/Sales ratio should the company set?
A)28.5%
B)30.0%
C)31.5%
D)33.1%
E)34.7%

Accepted Answer

If the fixed assets had been used at full capacity, then the sales would have been higher. Let's calculate the sales that would have been generated if the fixed assets were used at full capacity:

Full capacity sales = Actual sales ÷ (Fixed assets utilization rate/100)
Full capacity sales = $250 million ÷ (75/100) = $333.33 million

Now we can calculate the target Fixed Assets/Sales ratio:

Target Fixed Assets/Sales ratio = Fixed assets ÷ Full capacity sales

Target Fixed Assets/Sales ratio = $100 million ÷ $333.33 million = 0.30 or 30%

Therefore, the company should set its target Fixed Assets/Sales ratio at 30% if it wants to operate at full capacity.

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

If $75 million of fixed assets represent 80% capacity, then 100% capacity would be $75 million / 0.8 = $93.75 million. The sales at full capacity would be $250 million / 0.8 = $312.5 million.

Question 18

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 the first and most critical step in forecasting financial requirements, as it is the basis for determining future financial needs and estimating expenses and profits. The other options are not correct statements.

Question 19

Last year Handorf-Zhu Inc.had $850 million of sales,and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?
A)54.30%
B)57.16%
C)60.17%
D)63.33%
E)66.67%

Accepted Answer

The current capacity utilization is 60%, so the full capacity sales would be $850 million / 0.60 = $1,416.67 million. The maximum sales growth rate is calculated as (Full capacity sales - Current sales) / Current sales = ($1,416.67 million - $850 million) / $850 million = 66.67%.

Quiz 17: Financial Planning and Forecasting

Which of the following statements is CORRECT?

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?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Spontaneously generated funds are generally defined as follows:

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?

Last year Wei Guan Inc.had $350 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?

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.

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?

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 60% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

Quiz 17: Financial Planning and Forecasting

Which of the following statements is CORRECT?

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?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Spontaneously generated funds are generally defined as follows:

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?

Last year Wei Guan Inc.had $350 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?

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. ​

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?

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 60% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

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.