Exam 17: Forecasting

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?

The capital intensity ratio is generally defined as follows:

Which of the following statements is CORRECT?

Spontaneously generated funds are generally defined as follows:

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.

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

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.

Which of the following statements is CORRECT?

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?

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.

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.

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.

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.

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

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.

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