Question 1

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. D

Question 2

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  False

Question 3

Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital.For example,just-in-time inventory systems,multiple shifts for labor,and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.

Accepted Answer

A) True 
 B)False  True

Question 4

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 5

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 6

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

Question 7

The 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 8

Last year National Aeronautics had a FA/Sales ratio of 40%,comprised of $250 million of sales and $100 million of fixed assets.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 9

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 10

Weber Interstate Paving Co.had $450 million of sales and $225 million of fixed assets last year,so its FA/Sales ratio was 50%.However,its fixed assets were used at only 65% of capacity.If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity,with sales held constant at $450 million,how much cash (in millions)would it have generated?

Accepted Answer

A)  $74.81 
B)  $78.75 
C)  $82.69 
D)  $86.82 
E)  $91.16 
A)  $74.81 
B)  $78.75 
C)  $82.69 
D)  $86.82 
E)  $91.16

Question 11

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 12

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.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

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 16

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 17

Daniel Sawyer,the CEO of the Sawyer Group,is initiating planning for the company's operations next year,and he wants you to forecast the firm's additional funds needed (AFN).The firm is operating at full capacity.Data for use in your forecast are shown below.Based on the AFN equation,what is the AFN for the coming year? Dollars are in millions. $\begin{array}{l}
\begin{array}{lll}
\text { Last year's sales }=\mathrm{S}_{0} & \$ 350 & \text { Last year's accounts payal } &\$ 40 \
\text { Sales growth rate }=g & 30 \% & \text { Last year's notes payable } & \$ 50 \
\text { Last year's total assets }=\mathrm{A}_{0} * & \$ 500 & \text { Last year's accruals }& \$ 30  \
\text { Last year's profit margin }=\mathrm{PM} & 5 \% & \text { Target payout ratio } & 60 \%
\end{array}\
\begin{array}{r}
\end{array}
\end{array}$

Accepted Answer

A)  $102.8 
B)  $108.2 
C)  $113.9 
D)  $119.9 
E)  $125.9 
A)  $102.8 
B)  $108.2 
C)  $113.9 
D)  $119.9 
E)  $125.9

Question 18

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. $\begin{array}{lrlr}
\text { Last year's sales }=\mathrm{S}_{0} & \$ 300.0 & \text { Last year's accounts payable } & \$ 50.0 \
\text { Sales growth rate }=\mathrm{g} & 40 \% & \text { Last year's notes payable } & \$ 15.0 \
\text { Last year's total assets }=\mathrm{A}_{0} * & \$ 500.0 & \text { Last year's accruals } & \$ 20.0 \
\text { Last year's profit margin }=\mathrm{PM} & 20.0 \% & \text { Initial payout ratio } & 10.0 \%
\end{array}$

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 19

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 20

Which of the following statements is CORRECT?

Accepted Answer

A)  The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales. 
B)  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. 
C)  The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets. 
D)  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. 
E)  Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings. 
A)  The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales. 
B)  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. 
C)  The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets. 
D)  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. 
E)  Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.

Exam 12: Corporate Valuation and Financial Planning

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

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.

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.

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.

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.

The 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?

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.

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?

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.

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

Which of the following statements is CORRECT?

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.

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?

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

Valuation of Stocks and Corporations

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

Agency Conflicts and 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

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

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

Filters

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.