Question 1

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?

Accepted Answer

A)  28.5%
B)  30.0%
C)  31.5%
D)  33.1%
E)  34.7%F) None of the above
G) A) and C)

Question 2

As a firm's sales grow,its current assets also tend to increase.For instance,as sales increase,the firm's inventories generally increase,and purchases of inventories result in more accounts payable.Thus,spontaneously generated funds arise from transactions brought on by sales increases.

Accepted Answer

A) True 
 B)False

Question 3

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales,assuming the firm is operating with a positive profit margin.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

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.F) None of the above
G) A) and D)

Question 5

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

Accepted Answer

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 operating plan.F) A) and E)
G) B) and C)

Question 6

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?

Accepted Answer

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.F) B) and C)
G) All of the above

Question 7

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

A) True 
 B)False

Question 8

Spontaneously generated funds are generally defined as follows:

Accepted Answer

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.F) None of the above
G) A) and B)

Question 9

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

A) True 
 B)False

Question 10

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?

Accepted Answer

A)  $74.81
B)  $78.75
C)  $82.69
D)  $86.82
E)  $91.16F) B) and E)
G) C) and E)

Question 11

Which of the following statements is CORRECT?

Accepted Answer

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.F) None of the above
G) A) and B)

Question 12

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?

Accepted Answer

A)  3.40
B)  3.57
C)  3.75
D)  3.94
E)  4.14F) C) and D)
G) C) and E)

Question 13

If a firm wants to maintain its ratios at their existing levels,then if it has a positive sales growth rate of any amount,it will require some amount of external funding.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT?

Accepted Answer

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.F) B) and E)
G) None of the above

Question 15

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

A) True 
 B)False

Question 16

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.

Accepted Answer

A)  $74.6
B)  $78.5
C)  $82.7
D)  $87.0
E)  $91.4F) A) and D)
G) All of the above

Question 17

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio,while other inputs such as the tax rate and interest rate are not under its control.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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.F) A) and D)
G) A) and C)

Question 19

Which of the following statements is CORRECT?

Accepted Answer

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.F) C) and D)
G) All of the above

Exam 17: Financial Planning and Forecasting

Which of the following statements is CORRECT?

Correct Answer
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Spontaneously generated funds are generally defined as follows:

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

As a firm's sales grow,its current assets also tend to increase.For instance,as sales increase,the firm's inventories generally increase,and purchases of inventories result in more accounts payable.Thus,spontaneously generated funds arise from transactions brought on by sales increases.

Correct Answer
verified

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.

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio,while other inputs such as the tax rate and interest rate are not under its control.

Correct Answer
verified

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.

Correct Answer
verified

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?

Correct Answer
verified

Correct Answer
verified

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales,assuming the firm is operating with a positive profit margin.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

If a firm wants to maintain its ratios at their existing levels,then if it has a positive sales growth rate of any amount,it will require some amount of external funding.

Correct Answer
verified

Exam 17: Financial Planning and Forecasting

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Spontaneously generated funds are generally defined as follows:

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

As a firm's sales grow,its current assets also tend to increase.For instance,as sales increase,the firm's inventories generally increase,and purchases of inventories result in more accounts payable.Thus,spontaneously generated funds arise from transactions brought on by sales increases.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio,while other inputs such as the tax rate and interest rate are not under its control.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales,assuming the firm is operating with a positive profit margin.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a firm wants to maintain its ratios at their existing levels,then if it has a positive sales growth rate of any amount,it will require some amount of external funding.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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