Question 1

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 2

The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.

Accepted Answer

A) True 
 B)False

Question 3

You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year.The firm is operating at full capacity.Data for use in the forecast are shown below.However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm's investment bankers have recommended.Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. $$\begin{array} { l l l } 
\text { Last year's sales } = \mathrm { S } _ { 0 } & \$ 300.0 \text { Last year's accounts payable } & \$ 50.0 \
\text { Sal es growth rate } = \mathrm { g } & 40 \% \text { Last year's notes payable } & \$ 15.0 \
\text { Last year's total assets } = \mathrm { A } _ { 0 } ^ { * } & \$ 500.0 \text { Last year's accruals } & \$ 20.0 \
\text { Last year's profit margin = PM } & 20.0 \% \text { Initial payout ratio } & 10.0 \%
\end{array}$$

Accepted Answer

A)  $31.9 
B)  $33.6 
C)  $35.3 
D)  $37.0 
E)  $38.9 
A)  $31.9 
B)  $33.6 
C)  $35.3 
D)  $37.0 
E)  $38.9

Question 4

If Decker had a financing deficit, it could remedy the situation by

Accepted Answer

A)  buying back common stock 
B)  paying a special dividend 
C)  paying down its long-term debt 
D)  borrowing on its line of credit 
E)  borrowing from retained earnings 
A)  buying back common stock 
B)  paying a special dividend 
C)  paying down its long-term debt 
D)  borrowing on its line of credit 
E)  borrowing from retained earnings

Question 5

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions, by how much could Baron'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)  $207.78 
A)  $170.09 
B)  $179.04 
C)  $188.46 
D)  $197.88 
E)  $207.78

Question 6

The 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 7

Judd Enterprises
These are the simplified financial statements for Judd
Enterprises.
$\begin{array} { l r r } \text { Income statement } & \text { Current } & \text { Frojected } \ \text { Sales } & \text { na } & 1,000 \ \text { Costs } & \text { na } & \underline{720 }\ \text { Profit before tax } & \text { na } & 280 \ \text { Taxes } ( 25 \% ) & \text { na } & 70 \ \text { Net income } & \text { na } & 210 \ \text { Dividends } & \text { na } & 63 \end{array}$

$\begin{array} { l r r r r r } \text { Balance sheets } & \text { Current } & \text { Projected } && \text { Current } & \text { Projected } \ \text { Current assets } & 100 & 115 & \text { Current } & 70 & 81 \ \text { Net fixed assets } & 900 & 1,080& \text { liabilities } & \ & & & \text { Long-term debt } & 400 \ & & & \text { Common stock } & 300 \ & & & \text { Retained } & 230\&&&\text { earnings } \end{array}$ ?
-Refer to the Judd Enterprises financial statements.What is Judd's projected retained earnings under this plan?

Accepted Answer

A)  $339 
B)  $377 
C)  $396 
D)  $415 
E)  $440 
A)  $339 
B)  $377 
C)  $396 
D)  $415 
E)  $440

Question 8

A 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

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets.Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets. 
B)  If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth. 
C)  Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock.Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them. 
D)  If a firm has a positive free cash flow, then it must have either a zero or a negative AFN. 
E)  Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase. 
A)  Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets.Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets. 
B)  If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth. 
C)  Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock.Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them. 
D)  If a firm has a positive free cash flow, then it must have either a zero or a negative AFN. 
E)  Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.

Question 10

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 11

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.

Accepted Answer

A) True 
 B)False

Question 12

One 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 13

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

Accepted Answer

A)  54.30% 
B)  57.16% 
C)  60.17% 
D)  63.33% 
E)  66.67% 
A)  54.30% 
B)  57.16% 
C)  60.17% 
D)  63.33% 
E)  66.67%

Question 14

The AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time.However, this assumption can be relaxed when we use the forecasted financial statement method.Three conditions where constant ratios cannot be assumed are economies of scale, lumpy assets, and excess capacity.

Accepted Answer

A) True 
 B)False

Question 15

As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's expansion.

Accepted Answer

A) True 
 B)False

Question 16

Judd Enterprises
These are the simplified financial statements for Judd
Enterprises.
$\begin{array} { l r r } \text { Income statement } & \text { Current } & \text { Frojected } \ \text { Sales } & \text { na } & 1,000 \ \text { Costs } & \text { na } & \underline{720 }\ \text { Profit before tax } & \text { na } & 280 \ \text { Taxes } ( 25 \% ) & \text { na } & 70 \ \text { Net income } & \text { na } & 210 \ \text { Dividends } & \text { na } & 63 \end{array}$

$\begin{array} { l r r r r r } \text { Balance sheets } & \text { Current } & \text { Projected } && \text { Current } & \text { Projected } \ \text { Current assets } & 100 & 115 & \text { Current } & 70 & 81 \ \text { Net fixed assets } & 900 & 1,080& \text { liabilities } & \ & & & \text { Long-term debt } & 400 \ & & & \text { Common stock } & 300 \ & & & \text { Retained } & 230\&&&\text { earnings } \end{array}$ ?
-Refer to the Judd Enterprises financial statements.If Judd does not plan on issuing new stock or additional long-term debt, then what is the additional net financing needed for the projected year?

Accepted Answer

A)  $30 
B)  $33 
C)  $37 
D)  $339 
E)  $396 
A)  $30 
B)  $33 
C)  $37 
D)  $339 
E)  $396

Question 17

The capital intensity ratio is generally defined as follows:

Accepted Answer

A)  The percentage of liabilities that increase spontaneously as a percentage of sales. 
B)  The ratio of sales to current assets. 
C)  The ratio of current assets to sales. 
D)  The amount of assets required per dollar of sales, or A0*/S0. 
E)  Sales divided by total assets, i.e., the total assets turnover ratio. 
A)  The percentage of liabilities that increase spontaneously as a percentage of sales. 
B)  The ratio of sales to current assets. 
C)  The ratio of current assets to sales. 
D)  The amount of assets required per dollar of sales, or A0*/S0. 
E)  Sales divided by total assets, i.e., the total assets turnover ratio.

Question 18

A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.

Accepted Answer

A) True 
 B)False

Question 19

The 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 20

One 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

Exam 12: Corporate Valuation and Financial Planning

Which of the following statements is CORRECT?

The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.

If Decker had a financing deficit, it could remedy the situation by

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?

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

Which of the following statements is CORRECT?

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

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.

One 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.

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's expansion.

The capital intensity ratio is generally defined as follows:

A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.

The 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.

One 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.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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