Question 1

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  True

Question 2

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  True

Question 3

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 A

Question 4

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 level? All dollars are in millions.

Accepted Answer

A)   $31.9
B)   $33.6
C)   $35.3
D)   $37.0
E)   $38.9

Question 5

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 6

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.

Question 7

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 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

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

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.

Question 10

Weber Interstate Paving Co.had $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

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 12

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 13

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 14

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 15

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 16

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 17

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 18

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.

Accepted Answer

A)   $102.8
B)   $108.2
C)   $113.9
D)   $119.9
E)   $125.9

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.

Question 20

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

Exam 12: Corporate valuation and financial planning

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

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.

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?

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.

The capital intensity ratio is 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?

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.

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

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.

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

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 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?

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

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.