Question 1

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 previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.
B)   The company increases its dividend payout ratio.
C)   The company begins to pay employees monthly rather than weekly.
D)   The company's profit margin increases.
E)   The company decides to stop taking discounts on purchased materials.F) A) and C)
G) D) and E) B

Question 2

When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant. If financial ratios are not constant, regression techniques can be used to improve the financial forecast.

Accepted Answer

A) True 
 B)False

Question 3

Fairchild Garden Supply expects $600 million of sales this year, and it forecasts a 15% increase for next year. The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.25(Sales) . All dollars are in millions. What is the projected inventory turnover ratio for the coming year?

Accepted Answer

A)   3.40
B)   3.57
C)   3.75
D)   3.94
E)   4.14F) A) and C)
G) B) and E)

Question 4

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Accepted Answer

A) True 
 B)False  True

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   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.
C)   Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process.
D)   For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.
E)   Regression techniques cannot be used in situations where excess capacity or economies of scale exist.F) D) and E)
G) None of the above

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   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.
C)   If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
D)   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.
E)   If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.F) A) and B)
G) B) and D)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
C)   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.
D)   A firm's mission statement defines its lines of business and geographic area of operations.
E)   The corporate scope is a condensed version of the entire set of strategic plans.F) C) and E)
G) A) and E)

Question 8

Last year Emery Industries had $450 million of sales and $225 million of fixed assets, so its Fixed Assets/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)   $91.16F) None of the above
G) A) and D) B

Question 9

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

Question 10

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

Accepted Answer

A)   Funds that are obtained automatically from routine business transactions.
B)   Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations.
C)   The amount of assets required per dollar of sales.
D)   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.
E)   A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.F) C) and D)
G) D) and E)

Question 11

Last year Godinho Corp. had $250 million of sales, 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)   $379.8F) C) and E)
G) B) and E)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
B)   The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
C)   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.
D)   The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.
E)   The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy and economies of scale exist.F) C) and D)
G) A) and D)

Question 13

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Accepted Answer

A) True 
 B)False

Question 14

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 firm.

Accepted Answer

A) True 
 B)False

Question 15

Jefferson City Computers 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 sharp increase in its forecasted sales.
B)   A sharp reduction in its forecasted sales.
C)   The company reduces its dividend payout ratio.
D)   The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
E)   The company discovers that it has excess capacity in its fixed assets.F) A) and B)
G) C) and D)

Question 16

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 17

As 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, spontaneously generated funds arise from transactions brought on by sales increases.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is NOT a key element in strategic planning as it is described in the text?

Accepted Answer

A)   The mission statement.
B)   The statement of the corporation's scope.
C)   The statement of cash flows.
D)   The statement of corporate objectives.
E)   The operating plan.F) C) and D)
G) A) and E)

Question 19

Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its Fixed Assets/Sales ratio was 40%. 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 Fixed Assets/Sales ratio should the company set?

Accepted Answer

A)   28.5%
B)   30.0%
C)   31.5%
D)   33.1%
E)   34.7%F) A) and C)
G) All of the above

Question 20

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

Exam 17: Forecasting

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?

Correct Answer
verified
B

When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant. If financial ratios are not constant, regression techniques can be used to improve the financial forecast.

Correct Answer
verified

Correct Answer
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A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Correct Answer
verified
True

Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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B

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

Correct Answer
verified

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

Correct Answer
verified

Last year Godinho Corp. had $250 million of sales, 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?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Correct Answer
verified

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 firm.

Correct Answer
verified

Jefferson City Computers 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) ?

Correct Answer
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Correct Answer
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As 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, spontaneously generated funds arise from transactions brought on by sales increases.

Correct Answer
verified

Which of the following is NOT a key element in strategic planning as it is described in the text?

Correct Answer
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Correct Answer
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Correct Answer
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Exam 17: Forecasting

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?

Correct AnswerverifiedB

When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant. If financial ratios are not constant, regression techniques can be used to improve the financial forecast.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Correct AnswerverifiedTrue

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Last year Godinho Corp. had $250 million of sales, 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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Correct AnswerverifiedShow Answer

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 firm.

Correct AnswerverifiedShow Answer

Jefferson City Computers 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) ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

As 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, spontaneously generated funds arise from transactions brought on by sales increases.

Correct AnswerverifiedShow Answer

Which of the following is NOT a key element in strategic planning as it is described in the text?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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B

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True

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B

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