Question 1

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

Question 2

The capital intensity ratio is generally defined as follows:

Accepted Answer

A)  Sales divided by total assets, i.e., the total assets turnover ratio. 
B)  The percentage of liabilities that increase spontaneously as a percentage of sales. 
C)  The ratio of sales to current assets. 
D)  The ratio of current assets to sales. 
E)  The amount of assets required per dollar of sales, or A0*/S0.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  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. 
C)  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. 
D)  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. 
E)  Dividend policy does not affect the requirement for external funds based on the AFN equation.

Question 4

Spontaneously generated funds are generally defined as follows:

Accepted Answer

A)  Assets required per dollar of sales. 
B)  A forecasting approach in which the forecasted percentage of sales for each item is held constant. 
C)  Funds that a firm must raise externally through borrowing or by selling new common or preferred stock. 
D)  Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include spontaneous increases in accounts payable and accruals. 
E)  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.

Question 5

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A)  All balance sheet accounts are tied directly to sales. 
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 7

Kamath-Meier Corporation's CFO uses this equation, which was developed by regressing inventories on sales over the past 5 years, to forecast inventory requirements: Inventories = $22.0 + 0.125(Sales). The company expects sales of $400 million during the current year, and it expects sales to grow by 30% next year. What is the inventory forecast for next year? All dollars are in millions.

Accepted Answer

A)  $74.6 
B)  $78.5 
C)  $82.7 
D)  $87.0 
E)  $91.4

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income. 
B)  The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet. 
C)  Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast. 
D)  A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed. 
E)  If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the AFN method will provide more accurate forecasts than the projected financial statement method.

Question 9

Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company 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%

Question 10

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 11

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 12

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 13

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 14

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

Accepted Answer

A)  Assumptions are made about future levels of sales, costs, and interest rates for use in the forecast. 
B)  The entire financial plan is reexamined, assumptions are reviewed, and the management team considers how additional changes in operations might improve results. 
C)  Projected ratios are calculated and analyzed. 
D)  Develop a set of projected financial statements. 
E)  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.

Question 15

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Exam 17: Forecasting

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?

The capital intensity ratio is generally defined as follows:

Which of the following statements is CORRECT?

Spontaneously generated funds are generally defined as follows:

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.

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

Which of the following statements is CORRECT?

Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company 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.

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.

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.

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

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

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