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Exam 9: Corporate Valuation and Financial Planning

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Question 1

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Spontaneous funds are generally defined as follows:

A) a forecasting approach in which the forecasted percentage of sales for each item is held constant.
B) funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
C) 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.
D) 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.
E) assets required per dollar of sales.

F) A) and B)
G) A) and C)

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C

Question 2

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One of the necessary steps in the financial planning process is a forecast of financial statements under each alternative version of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.

A) True
B) False

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Question 3

Multiple Choice

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Which of the following statements is CORRECT?

A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.

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.

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.

Which of the following statements is CORRECT?

If a firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing.

The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.

A firm's profit margin is 5%, its debt/assets ratio is 56%, and its dividend payout ratio is 40%. If the firm is operating at less than full capacity, then sales could increase to some extent without the need for external funds, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require some external financing.

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

If Decker had a financing surplus, it could remedy the situation by

Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets. 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 FA/Sales ratio should the company set?

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?

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?

Judd Enterprises These are the simplified financial statements for Judd Enterprises. $\begin{array}{lcr}\text { Income statement } & \text { CurrentProjected } & \\ \text { Sales } & \text { na } & 1,000 \\ \text { Costs } & \text { na } & 700 \\ \text { Profit before tax } & \text { na } & 300 \\ \text { Taxes } & \text { na } & 90 \\ \text { Net income } & \text { na } & 210 \\ \text { Dividends } & \text { na } & 63\end{array}$ $\begin{array}{lcrlcc}\text { Balance sheets } & \text { Current Projected } & &&{\text { Current Projected }} \\\text { Current assets } & 100 & 115 & \text { Current liabilities } & 70 & 81 \\& 900 & 1,080 & \text { Long-term debt } & 400 \\& & & \text { Common stock } & 300 \\& & & \text { Retained earnings } & 230\\\end{array}$ -Refer to the Judd Enterprises financial statements. What is Judd's projected retained earnings under this planσ

The Besnier Company had $250 million of sales last year, 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?

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

F. Marston, Inc. 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) ?

Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital. Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible.