Question 1

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 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

Statement C is correct because it acknowledges that firms with "lumpy" fixed assets (assets that are added in large, discrete units) often have excess capacity. This excess capacity should indeed be considered in financial forecasting, as it means the firm can increase production without immediately requiring additional investment in fixed assets.

Question 3

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 75%,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) $56.2
B) $54.6
C) $57.3
D) $67.7
E) $53.0

Accepted Answer

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

Question 4

Fairchild Garden Supply expects $590 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) 3.84 times
B) 3.23 times
C) 3.63 times
D) 3.60 times
E) 3.40 times

Accepted Answer

The answer of Fairchild Garden Supply expects $590 million of...

Question 5

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 is correct because Additional Funds Needed (AFN) often involve acquiring financing through notes payable, long-term debt, and equity, which are non-spontaneous sources of funds requiring deliberate financing decisions.

Question 6

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 crucial step in forecasting financial requirements because it determines the level of assets, production, and financing needed to support those sales. The breakdown of common equity is important, but it is not the most critical step. Forecasted financial statements are used for various purposes, including external reporting and internal decision-making, not just for managerial compensation evaluation. The capital intensity ratio measures the level of fixed assets relative to sales, not their physical condition. The AFN equation and the forecasted financial statement method are both useful for forecasting financial requirements, and which one is more accurate depends on various factors, not just the lumpiness of fixed assets and economies of scale.

Question 7

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 pricing is not a step in the financial planning process. This would be considered collusion and potentially illegal. The other options are all steps in the financial planning process.

Question 8

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 $550.0 million during the current year,and it expects sales to grow by 33% next year.What is the inventory forecast for next year? All dollars are in millions.
A) $140.7
B) $131.6
C) $89.6
D) $113.4
E) $88.5

Accepted Answer

First, we need to find the inventory forecast for the current year:
Inventories = $22.0 + 0.125(Sales)
Inventories = $22.0 + 0.125($550.0)
Inventories = $88.5 million

Next, we can use the projected sales growth rate of 33% to find the inventory forecast for next year:
Next year's sales = $550.0 million + ($550.0 million * 0.33) = $731.5 million
Inventories = $22.0 + 0.125(Sales)
Inventories = $22.0 + 0.125($731.5)
Inventories = $113.4 million

Therefore, the inventory forecast for next year is $113.4 million, which corresponds to choice (D).

Question 9

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) $87.4
B) $124.1
C) $120.8
D) $107.9
E) $90.6

Accepted Answer

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

Question 10

Last year Handorf-Zhu Inc.had $850 million of sales,and it had $425 million of fixed assets that were used at only 90% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?
A) 9.00%
B) 13.00%
C) 12.00%
D) 10.33%
E) 11.11%

Accepted Answer

Since Handorf-Zhu Inc. was operating at only 90% of capacity, it means they could increase their operations to 100% without acquiring new fixed assets. The current sales are $850 million, and the fixed assets are $425 million. To find the maximum sales growth rate before needing new fixed assets, we calculate the additional capacity available: 10% (since they are at 90% capacity). To find the maximum sales growth, we calculate $850 \times \frac{10}{90} = 94.44$ million more in sales. The growth rate is then $\frac{94.44}{850} \times 100 = 11.11\%$.

Question 11

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) -$5,400
B) -$7,140
C) -$6,000
D) -$6,720
E) -$6,360

Accepted Answer

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

Question 12

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 detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives over a specific time horizon. Many companies use a 1-year horizon, but longer or shorter time horizons are also possible.

Question 13

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 a firm can achieve without external financing. It is calculated by multiplying the return on equity by the retention ratio. At this growth rate, the firm's AFN will be zero, which means that it can fund its growth entirely from internal sources.

Question 14

Last year Godinho Corp.had $320 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) $352.0
B) $392.0
C) $388.0
D) $436.0
E) $400.0

Accepted Answer

If fixed assets were operated at 80% of capacity, then there is still 20% of capacity left to generate additional sales. We can calculate the maximum sales by dividing the current sales by the capacity that is being used, and then dividing by 0.8 to get to full capacity.

Maximum sales = Current sales / (Capacity used / Capacity available) 
Maximum sales = $320 million / (0.8) 
Maximum sales = $400 million

Therefore, the answer is (E) $400.0 million.

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) 13.3%
B) 14.1%
C) 16.0%
D) 18.2%
E) 18.4%

Accepted Answer

The answer of Last year Jain Technologies had $250 million...

Question 16

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 is incorrect because it refers to assets required per dollar of sales, not spontaneously generated funds. Option B is incorrect because it refers to a forecasting approach in which the forecasted percentage of sales for each item is held constant, not spontaneously generated funds. Option C is incorrect because it refers to funds that must be raised externally, not spontaneously generated funds. Option E is incorrect because it refers to the amount of cash raised in a given year minus the amount of cash needed to finance additional capital expenditures and working capital to support the firm's growth, not spontaneously generated funds.

Question 17

Last year Wei Guan Inc.had $275 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) $137.71
B) $159.92
C) $115.50
D) $155.48
E) $148.08

Accepted Answer

Wei Guan Inc. was operating at 65% capacity, so to find the full capacity sales, we divide the current sales by the current capacity utilization: $275 million / 0.65 = $423.08 million. This means the company could handle up to $423.08 million in sales with its current fixed assets. The difference between this full capacity sales level and the current sales level gives the increase in sales possible before needing more fixed assets: $423.08 million - $275 million = $148.08 million.

Question 18

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 85% 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) $38.14
B) $33.75
C) $30.38
D) $36.79
E) $27.68

Accepted Answer

To find the cash generated, first calculate the full capacity sales: $450 million / 0.85 = $529.41 million. The Fixed Assets/Sales ratio at full capacity is 50%, so required fixed assets at full capacity = 0.50 * $529.41 million = $264.71 million. The current fixed assets are $225 million, so the excess fixed assets = $264.71 million - $225 million = $39.71 million. The cash generated by selling the excess fixed assets is $39.71 million - $6 million (15% of $39.71 million) = $33.75 million.

Question 19

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 internal financing available (from retained earnings and spontaneous financing) than what is required for its projected growth in assets. This means the company might not need to seek external financing.

Quiz 17: Financial Planning and Forecasting

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 statements is CORRECT?

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

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 Handorf-Zhu Inc.had $850 million of sales,and it had $425 million of fixed assets that were used at only 90% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

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?

Last year Godinho Corp.had $320 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?

Spontaneously generated funds are generally defined as follows:

Last year Wei Guan Inc.had $275 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?

Which of the following statements is CORRECT?

Quiz 17: Financial Planning and Forecasting

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 statements is CORRECT?

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

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 Handorf-Zhu Inc.had $850 million of sales,and it had $425 million of fixed assets that were used at only 90% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

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?

Last year Godinho Corp.had $320 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?

Spontaneously generated funds are generally defined as follows:

Last year Wei Guan Inc.had $275 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?

Which of the following statements is CORRECT?

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.

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?