Question 1

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 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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 5

A 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 6

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,spontaneous liabilities that reduce AFN arise from transactions brought on by sales increases.

Accepted Answer

A) True 
 B)False

Question 7

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

Question 8

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 9

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 10

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 11

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 12

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 13

F.Marston,Inc.has developed a forecasting model to estimate its AFN for the upcoming year.All else being equal,which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?

Accepted Answer

A)  A switch to a just-in-time inventory system and outsourcing production. 
B)  The company reduces its dividend payout ratio. 
C)  The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35. 
D)  The company discovers that it has excess capacity in its fixed assets. 
E)  A sharp increase in its forecasted sales. 
A)  A switch to a just-in-time inventory system and outsourcing production. 
B)  The company reduces its dividend payout ratio. 
C)  The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35. 
D)  The company discovers that it has excess capacity in its fixed assets. 
E)  A sharp increase in its forecasted sales.

Question 14

In your internship with Lewis,Lee,& Taylor Inc.you have been asked to forecast the firm's additional funds needed (AFN)for next year.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? $\begin{array}{lrlr}
\text { Last year's sales }=S_{0} & \$ 200,000 & \text { Last year's accounts payable } & \$ 50,000 \
\text { Sales growth rate }=g & 40 \% & \text { Last year's notes payable } & \$ 15,000 \
\text { Last year's total assets }=\mathrm{A}_{0} * & \$ 135,000 & \text { Last year's accruals } & \$ 20,000 \
\text { Last year's profit margin }=\text { PM } & 20.0 \% & \text { Target payout ratio } & 25.0 \%
\end{array}$

Accepted Answer

A)  -$14,440 
B) -$15,200 
C)  -$16,000 
D)  -$16,800 
E) -$17,640 
A)  -$14,440 
B) -$15,200 
C)  -$16,000 
D)  -$16,800 
E) -$17,640

Question 15

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 16

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 17

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 18

Two firms with identical capital intensity ratios are generating the same amount of sales.However,Firm A is operating at full capacity,while Firm B is operating below capacity.If the two firms expect the same growth in sales during the next period,then Firm A is likely to need more additional funds than Firm B,other things held constant.

Accepted Answer

A) True 
 B)False

Question 19

A 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 20

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.

Exam 12: Corporate Valuation and Financial Planning

Which of the following statements is CORRECT?

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.

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

The capital intensity ratio is generally defined as follows:

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

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,spontaneous liabilities that reduce AFN 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 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.

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?

Which of the following statements is CORRECT?

F.Marston,Inc.has developed a forecasting model to estimate its AFN for the upcoming year.All else being equal,which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?

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.

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.

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.

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

Spontaneous funds are generally defined as follows:

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

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