Exam 17: Financial Planning and Forecasting

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.

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.

A company expects sales to increase during the coming year,and it is using the AFN equation to forecast the additional capital that it must raise.Which of the following conditions would cause the AFN to increase?

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.

Which of the following statements is CORRECT?

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.

Spontaneously generated funds are generally defined as follows:

Last year Wei Guan Inc.had $625 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 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 term "additional funds needed (AFN)" is generally defined as follows:

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.

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.

Howton & Howton Worldwide (HHW)is planning its operations for the coming year,and the CEO wants you to forecast the firm's additional funds needed (AFN).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. Last year's sales = \ 300 Last year's accounts payable \ 50 Sal es growth rate = 40\% Last year's notes payable \ 15 Last year's total assets = \ 500 Last year's accruals \ 20 Last year's profit margin = PM 20\% Initi al payout ratio 10\% New payout ratio 50\% ?

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

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

If a firm's capital intensity ratio $\left( \mathrm { A } _ { 0 } { } ^ { * } / \mathrm { S } _ { 0 } \right)$ decreases as sales increase,use of the AFN formula is likely to understate the amount of additional funds required,other things held constant.

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 $275.0 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.