Question 1

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 2

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 3

mission statement is a statement of the firm's overall purpose.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

Errors in the sales forecast can be offset by similar errors in costs and income forecasts Thus, as long as the errors are not large, sales forecast accuracy is not critical to the well being of the firm.

Accepted Answer

A) True 
 B)False

Question 7

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 8

a firm has defined its purpose, scope, and objectives, it must develop a strategy for achieving its goals Corporate strategies are detailed plans rather than broad approaches.

Accepted Answer

A) True 
 B)False

Question 9

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.

Question 10

Weber Interstate Paving Cohad $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

Question 11

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%

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives. 
B)  Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon. 
C)  A firm's mission statement defines its lines of business and geographic area of operations. 
D)  The corporate scope is a condensed version of the entire set of strategic plans. 
E)  Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals.

Question 13

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 14

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 15

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 16

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.

Question 17

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

Question 18

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 19

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%

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 9: Forecasting

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 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.

mission statement is a statement of the firm's overall purpose.

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.

Errors in the sales forecast can be offset by similar errors in costs and income forecasts Thus, as long as the errors are not large, sales forecast accuracy is not critical to the well being of the firm.

a firm has defined its purpose, scope, and objectives, it must develop a strategy for achieving its goals Corporate strategies are detailed plans rather than broad approaches.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

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.

capital intensity ratio is generally defined as follows:

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?

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.

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?

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