Exam 12: Financial Planning and Applications to Corporate Valuation

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)?

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.

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

The capital intensity ratio is generally defined as follows:

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

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.

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.

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.

Based on the projections,Decker will have

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 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.

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 statements is CORRECT?

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.

Spontaneous funds are 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.

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?

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

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.