Answer:
b. False
Question: 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. a. True b. False
Answer:
a. True
Question: 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? 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.
Answer:
b
Question: 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. a. True b. False
Answer:
b. False
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer:
c. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in the financial forecasting process.
Question: 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. a. True b. False
Answer:
a. True
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer:
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.
Question: The term “additional funds needed (AFN)” is generally defined as follows: 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.
Answer:
b
Question: A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset. a. True b. False
Answer:
a. True
Question: Spontaneously generated funds are generally defined as follows: a. Assets required per dollar of sales. b. A forecasting approach in which the forecasted percentage of sales for each balance sheet account 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.
Answer:
d
Question: 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)? 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.
Answer:
a. A sharp increase in its forecasted sales.
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer:
d. A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed.
Question: 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. a. True b. False
Answer:
b. False
Question: Which of the following is NOT one of the steps taken in the financial planning process? 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.
Answer:
e
Question: The capital intensity ratio is generally defined as follows: 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.
Answer:
e
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer:
b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.