Question 1

Jefferson City Computers 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) ?

Accepted Answer

A)   A sharp increase in its forecasted sales.
B)   A sharp reduction in its forecasted sales.
C)   The company reduces its dividend payout ratio.
D)   The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
E)   The company discovers that it has excess capacity in its fixed assets.F) A) and B)
G) C) and D)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

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

Question 3

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

Accepted Answer

A)   Funds that are obtained automatically from routine business transactions.
B)   Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations.
C)   The amount of assets required per dollar of sales.
D)   The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
E)   A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.F) A) and D)
G) C) and D)

Question 4

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

Accepted Answer

A) True 
 B)False

Question 5

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 C)
G) A) and E)

Question 6

The capital intensity ratio is generally defined as follows:

Accepted Answer

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 sales to current assets.
D)   The ratio of current assets to sales.
E)   The amount of assets required per dollar of sales, or A0*/S0.F) B) and C)
G) All of the above

Question 7

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  True

Question 8

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 9

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

Accepted Answer

A) True 
 B)False

Question 10

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

Accepted Answer

A) True 
 B)False

Question 11

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) All of the above
G) A) and D) D

Question 12

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 13

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) D) and E)

Question 14

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) C) and D)
G) B) and C)

Question 15

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

Question 16

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?

Accepted Answer

A)   $170.09
B)   $179.04
C)   $188.46
D)   $197.88
E)   $207.78F) A) and E)
G) A) and B)

Question 17

A firm's profit margin is 5%, its debt 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.

Accepted Answer

A) True 
 B)False

Question 18

When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant. If financial ratios are not constant, regression techniques can be used to improve the financial forecast.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following assumptions is embodied in the AFN equation?

Accepted Answer

A)   All balance sheet accounts are tied directly to sales.
B)   Accounts payable and accruals are tied directly to sales.
C)   Common stock and long-term debt are tied directly to sales.
D)   Fixed assets, but not current assets, are tied directly to sales.
E)   Last year's total assets were not optimal for last year's sales.F) A) and B)
G) B) and D)

Question 20

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

Exam 16: Financial Planning and Forecasting

Jefferson City Computers 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) ?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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C

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

Correct Answer
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A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

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

Correct Answer
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The capital intensity ratio is generally defined as follows:

Correct Answer
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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
True

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

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

Correct Answer
verified

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

Correct Answer
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Correct Answer
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D

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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?

Correct Answer
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Correct Answer
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When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant. If financial ratios are not constant, regression techniques can be used to improve the financial forecast.

Correct Answer
verified

Which of the following assumptions is embodied in the AFN equation?

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

Exam 16: Financial Planning and Forecasting

Jefferson City Computers 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) ?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedC

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

Correct AnswerverifiedShow Answer

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The capital intensity ratio is generally defined as follows:

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 AnswerverifiedTrue

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

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

Correct AnswerverifiedShow Answer

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedD

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant. If financial ratios are not constant, regression techniques can be used to improve the financial forecast.

Correct AnswerverifiedShow Answer

Which of the following assumptions is embodied in the AFN equation?

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

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C

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True

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D

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