Exam 9: Financial Planning and Forecasting Financial Statements

The fact that long-term debt and equity funds are raised infrequently and in large amounts lessens the need for the firm to forecast them on a continual basis.

Which of the following statements is most correct?

The percentage of sales method assumes that all financial ratios are constant, which means, for example, that if you plotted a graph of inventories versus sales, the regression line would be linear and would have a positive Y-intercept.

Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following statements is most correct?

Using the AFN formula approach, calculate the total assets of Harmon Photo Company given the following information: Sales this year = $3,000; increase in sales projected for next year = 20 percent; net income this year = $250; dividend payout ratio = 40 percent; projected excess funds available next year = $100; accounts payable = $600; notes payable = $100; and accrued wages and taxes = $200. Except for the accounts noted, there were no other current liabilities. Assume that the firm's profit margin remains constant and that the company is operating at full capacity.

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

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Any firm with a positive growth rate in sales will require some amount of external funding, assuming all existing ratios are to be maintained.

A company is forecasting an increase in sales and is using the AFN model to forecast the additional capital that they need to raise. Which of the following factors are likely to increase the additional funds needed (AFN)?

The percentage of sales method is based on which of the following assumptions?

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

As a firm's sales grow its current asset accounts tend to increase. For instance, as sales increase the firm's inventories increase and its level of accounts payable will increase. Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.

Considering each action independently and holding other things constant, which of the following actions would reduce a firm's need for additional capital?

An increase in the firm's inventory balance will normally require additional financing unless the increase is matched by an equally large decrease in some other asset account.

You have been given the attached information on the Crum Company. Crum expects sales to grow by 50 percent in the next year and operating costs should increase in proportion to sales. Fixed assets were being operated at 40 percent of capacity in the most recent year, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase in proportion to sales during the next year. The company plans to finance any external funds needed as 35 percent notes payable and 65 percent common stock. The interest rate is 8 percent; base interest expense on the debt at the beginning of the year (cash earns no interest income). The dividend payout ratio will remain constant, irrespective of how many shares of stock are outstanding. What is Crum's projected ROE using the percentage of sales method? (Ignore any financing feedback effects.)

One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income.

Which of the following statements is most correct?

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.