Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet. 
B)  Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast. 
C)  A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed. 
D)  If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method. 
E)  Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income. 
A)  The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet. 
B)  Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast. 
C)  A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed. 
D)  If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method. 
E)  Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income. C

Question 2

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.

Accepted Answer

A) True 
 B)False  False

Question 3

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  False

Question 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

A)  Monitor operations after implementing the plan to spot any deviations and then take corrective actions. 
B)  Determine the amount of capital that will be needed to support the plan. 
C)  Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios. 
D)  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. 
E)  Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised. 
A)  Monitor operations after implementing the plan to spot any deviations and then take corrective actions. 
B)  Determine the amount of capital that will be needed to support the plan. 
C)  Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios. 
D)  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. 
E)  Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.

Question 6

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?

Accepted Answer

A)  $312.5 
B)  $328.1 
C)  $344.5 
D)  $361.8 
E)  $379.8 
A)  $312.5 
B)  $328.1 
C)  $344.5 
D)  $361.8 
E)  $379.8

Question 7

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

Accepted Answer

A)  Accounts payable and accruals are tied directly to sales. 
B)  Common stock and long-term debt are tied directly to sales. 
C)  Fixed assets, but not current assets, are tied directly to sales. 
D)  Last year's total assets were not optimal for last year's sales. 
E)  None of the firm's ratios will change. 
A)  Accounts payable and accruals are tied directly to sales. 
B)  Common stock and long-term debt are tied directly to sales. 
C)  Fixed assets, but not current assets, are tied directly to sales. 
D)  Last year's total assets were not optimal for last year's sales. 
E)  None of the firm's ratios will change.

Question 8

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 9

fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  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. 
C)  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. 
D)  Dividend policy does not affect the requirement for external funds based on the AFN equation. 
E)  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. 
A)  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. 
B)  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. 
C)  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. 
D)  Dividend policy does not affect the requirement for external funds based on the AFN equation. 
E)  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.

Question 11

of the first steps in arriving at a firm's forecasted financial statements is a review of industry-average operating ratios relative to these same ratios for the firm to determine whether changes to the ratios need to be made.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process. 
C)  For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets. 
D)  There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases. The Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship. 
E)  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. 
A)  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. 
B)  Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process. 
C)  For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets. 
D)  There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases. The Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship. 
E)  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.

Question 13

firm's AFN must come from external sources Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.

Accepted Answer

A) True 
 B)False

Question 14

Operating plans sketch out broad approaches for realization of the firm's strategic vision These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A)  The statement of the corporation's scope. 
B)  The statement of cash flows. 
C)  The statement of corporate objectives. 
D)  The corporation's strategies. 
E)  The mission statement. 
A)  The statement of the corporation's scope. 
B)  The statement of cash flows. 
C)  The statement of corporate objectives. 
D)  The corporation's strategies. 
E)  The mission statement.

Question 19

Spontaneous funds are generally defined as follows:

Accepted Answer

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. 
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.

Question 20

Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence, they have a greater need for external financing There are currently no alternatives for these types of firms to lower their asset requirements.

Accepted Answer

A) True 
 B)False

Exam 9: Forecasting

Which of the following statements is CORRECT?

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.

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

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

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?

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

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

fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Which of the following statements is CORRECT?

of the first steps in arriving at a firm's forecasted financial statements is a review of industry-average operating ratios relative to these same ratios for the firm to determine whether changes to the ratios need to be made.

Which of the following statements is CORRECT?

firm's AFN must come from external sources Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.

Operating plans sketch out broad approaches for realization of the firm's strategic vision These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.

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.

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

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.

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

Spontaneous funds are generally defined as follows:

Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence, they have a greater need for external financing There are currently no alternatives for these types of firms to lower their asset requirements.

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