Question 1

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

Accepted Answer

A)  buying back common stock 
B)  paying a special dividend 
C)  paying down its long-term debt 
D)  borrowing on its line of credit 
E)  borrowing from retained earnings 
A)  buying back common stock 
B)  paying a special dividend 
C)  paying down its long-term debt 
D)  borrowing on its line of credit 
E)  borrowing from retained earnings

Question 2

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 3

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 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

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?
$\begin{array}{l}
\begin{array}{lc}
\text { Last year's sales }=S_{0} & \$ 200,000 \text { Last year's accounts payab } \
\text { Sales growth rate }=g & 40 \% \text { Last year's notes payable } \
\text { Last year's total assets }=A_{0} * & \$ 135,000 \text { Last year's accruals } \
\text { Last year's profit margin }=\text { PM } & 20.0\% \text { Target payout ratio }
\end{array}
\begin{array}{r}
\$ 50,000 \
\$ 15,000 \
\$ 20,000 \
25.0 \%
\end{array}
\end{array}$

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 6

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 7

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 8

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 9

Based on the projections, Decker will have

Accepted Answer

A)  a financing surplus of $36 
B)  a financing deficit of $36 
C)  a financing surplus of $255 
D)  a financing deficit of $255 
E)  zero financing surplus or deficit 
A)  a financing surplus of $36 
B)  a financing deficit of $36 
C)  a financing surplus of $255 
D)  a financing deficit of $255 
E)  zero financing surplus or deficit

Question 10

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 11

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 12

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.

Question 13

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

Question 14

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 levelσ All dollars are in millions. 
$\begin{array}{l}
\begin{array}{lc}
\text { Last year's sales }=S_{0} & \$ 300.0 \text { Last year's accounts payal } \
\text { Sales growth rate }=\mathrm{g} & 40 \% \text { Last year's notes payable } \
\text { Last year's total assets }=\mathrm{A}_{0}{ }^{*} & \$ 500.0 \text { Last year's accruals } \
\text { Last year's profit margin }=\text { PM } & 20.0 \% \text { Initial payout ratio }
\end{array}
\begin{array}{r}
\$ 50.0 \
\$ 15.0 \
\$ 20.0 \
10.0 \%
\end{array}
\end{array}$

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 15

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

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.

Question 16

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. 
$\begin{array}{l}
\begin{array}{lc}
\text { Last year's sales }=S_{0} & \$ 350 \text { Last year's accounts payab } \
\text { Sales growth rate }=g & 30 \% \text { Last year's notes payable } \
\text { Last year's total assets }=A_{0} * & \$ 500 \text { Last year's accruals } \
\text { Last year's profit margin }=\text { PM } & 5 \% \text { Target payout ratio }
\end{array}
\begin{array}{r}
\$ 40 \
\$ 50\
\$ 30 \
60 \%
\end{array}
\end{array}$

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 17

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 18

Judd Enterprises
These are the simplified financial statements for Judd
Enterprises.
$ \begin{array}{lcr}\text { Income statement } & \text { CurrentProjected } & \ \text { Sales } & \text { na } & 1,000 \ \text { Costs } & \text { na } & 700 \ \text { Profit before tax } & \text { na } & 300 \ \text { Taxes } & \text { na } & 90 \ \text { Net income } & \text { na } & 210 \ \text { Dividends } & \text { na } & 63\end{array} $

$\begin{array}{lcrlcc}
\text { Balance sheets } & \text { Current Projected } & &&{\text { Current Projected }} \
\text { Current assets } & 100 & 115 & \text { Current liabilities } & 70 & 81 \
& 900 & 1,080 & \text { Long-term debt } & 400 \
& & & \text { Common stock } & 300 \
& & & \text { Retained earnings } & 230\

\end{array}$

-Refer to the Judd Enterprises financial statements. If Judd does not plan on issuing new stock or additional long-term debt, then what is the additional net financing needed for the projected year?

Accepted Answer

A)  $30 
B)  $33 
C)  $37 
D)  $339 
E)  $396 
A)  $30 
B)  $33 
C)  $37 
D)  $339 
E)  $396

Question 19

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 20

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

Exam 9: Corporate Valuation and Financial Planning

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

The capital intensity ratio is generally defined as follows:

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.

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.

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

Based on the projections, Decker will have

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.

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

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

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

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Risk and Return-Part II

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

Filters