Question 1

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

Accepted Answer

A) True 
 B)False

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

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 4

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 5

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

Accepted Answer

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

Question 6

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?

Accepted Answer

A) 	The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. 
B) 	The company increases its dividend payout ratio. 
C) 	The company begins to pay employees monthly rather than weekly. 
D) 	The company’s profit margin increases. 
E) 	The company decides to stop taking discounts on purchased materials. 
A) 	The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. 
B) 	The company increases its dividend payout ratio. 
C) 	The company begins to pay employees monthly rather than weekly. 
D) 	The company’s profit margin increases. 
E) 	The company decides to stop taking discounts on purchased materials.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings. 
B)  The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales. 
C)  Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management's historical performance is evaluated. 
D)  The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets. 
E)  The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists. 
A)  Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings. 
B)  The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales. 
C)  Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management's historical performance is evaluated. 
D)  The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets. 
E)  The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists.

Question 8

Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital. Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible.

Accepted Answer

A) True 
 B)False

Question 9

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?

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 10

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

Accepted Answer

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

Question 11

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

Accepted Answer

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

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals. 
B)  A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives. 
C)  Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon. 
D)  A firm's mission statement defines its lines of business and geographic area of operations. 
E)  The corporate scope is a condensed version of the entire set of strategic plans. 
A)  Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals. 
B)  A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives. 
C)  Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon. 
D)  A firm's mission statement defines its lines of business and geographic area of operations. 
E)  The corporate scope is a condensed version of the entire set of strategic plans.

Question 14

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

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its FA/Sales ratio was 40%. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?

Accepted Answer

A)  28.5% 
B)  30.0% 
C)  31.5% 
D)  33.1% 
E)  34.7% 
A)  28.5% 
B)  30.0% 
C)  31.5% 
D)  33.1% 
E)  34.7%

Question 17

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 18

The 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 g.

Accepted Answer

A) True 
 B)False

Question 19

Last year Godinho Corp. had $250 million of sales, 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 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: Financial Planning and Forecasting Financial Statements

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

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.

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.

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.

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

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?

Which of the following statements is CORRECT?

Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital. Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible.

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?

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

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

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 statements is CORRECT?

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.

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.

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 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 g.

Last year Godinho Corp. had $250 million of sales, 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?

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

Risks and Rates of Return

Stocks and Their Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Corporate Valuation, Value-Based Management, and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

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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