Question 1

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 offers a longer credit period (with all other terms held equal) .
D)   the company discovers that it has excess capacity in its fixed assets.
E)   a sharp increase in its forecasted sales. E

Question 2

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. C

Question 3

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% E

Question 4

Last 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 5

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the afn forecast.
C)   a negative afn indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed.
D)   if the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the afn equation will provide more accurate forecasts than the forecasted financial statements method.
E)   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.

Question 6

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

Question 7

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 8

One of the necessary steps in the financial planning process is a forecast of financial statements under each alternative version of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.

Accepted Answer

A) True 
 B)False

Question 9

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.

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

The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?

Accepted Answer

A)   $312.5
B)   $328.1
C)   $344.5
D)   $361.8
E)   $379.8

Question 12

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 13

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. What is Judd's projected retained earnings under this planσ

Accepted Answer

A)   $339
B)   $377
C)   $396
D)   $415
E)   $440

Question 14

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

Accepted Answer

A)   borrowing on its line of credit.
B)   issuing more common stock.
C)   reducing its dividend.
D)   borrowing from its retained earnings
E)   paying a special dividend

Question 15

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 16

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 17

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 18

Which of the following statements is CORRECT?

Accepted Answer

A)   when fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.
B)   firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process.
C)   for a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.
D)   there are economies of scale in the use of many kinds of assets. when economies occur the ratios are likely to remain constant over time as the size of the firm increases. the economic ordering quantity model for establishing inventory levels demonstrates this relationship.
E)   when we use the afn equation, we assume that the ratios of assets and liabilities to sales (a0*/s0 and l0*/s0)  vary from year to year in a stable, predictable manner.

Question 19

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

Accepted Answer

A)   funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
B)   the amount of assets required per dollar of sales.
C)   the amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
D)   a forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
E)   funds that are obtained automatically from routine business transactions.

Question 20

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

Exam 9: Corporate Valuation and Financial Planning

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) ?

Spontaneous funds are generally defined as follows:

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?

Which of the following statements is CORRECT?

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?

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.

One of the necessary steps in the financial planning process is a forecast of financial statements under each alternative version of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.

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 Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?

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.

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

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.

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.

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.

Which of the following statements is CORRECT?

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

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.