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Exam 5: Financial Planning and Forecasting Financial Statements

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Question 1

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

A) True
B) False

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Question 2

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Which of the following best defines the term "capital intensity ratio"?

A) sales divided by total assets, i.e., the total assets turnover ratio
B) the percentage of liabilities that increase spontaneously as a percentage of sales
C) the ratio of current assets to sales
D) the amount of assets required per dollar of sales, or A*/S₀

E) A) and B)
F) A) and C)

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Question 3

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By developing a financial plan, a firm benefits by being forced to think about and forecast the future, set goals and establish priorities, and make sure that goals are internally consistent.

The AFN formula would be appropriate if, in a regression of each asset and spontaneous liability on sales, the regression line was linear and passed through the origin.

Which of the following statements is correct?

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?

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? Last year's sales = S₀ $200,000 Last year's accounts payable $50,000 Sales growth rate = g 40% Last year's notes payable (to bank) $15,000 Last year's total assets = A₀ $135,000 Last year's accruals $20,000 Last year's profit margin = M 20) 0% Target payout ratio 25) 0%

If a firm's capital intensity ratio (A*/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 best defines the term "additional funds needed (AFN) "?

Suppose a firm has net income of $8 on sales of $40, fixed assets of $75, and total assets of $90. The firm retains 50% of its earnings. If the firm is operating at 80% capacity, what are the full capacity sales?

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?

Which assumption is embodied in the AFN formula forecasting method?

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

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?

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.

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?

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.

Jefferson City Computers has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which factor is most likely to lead to an increase of the additional funds needed?

The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast.

Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its FA/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 FA/Sales ratio should the company set?