Answer Choices:
a. True
b. False
Answer: False
Question: The term “additional funds needed (AFN)” is generally defined as follows:
Answer Choices:
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. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations.
Question: The term “spontaneously generated funds” generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.
Answer Choices:
a. True
b. False
Answer: False
Question: Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.
Answer Choices:
a. True
b. False
Answer: a. True
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)?
Answer Choices:
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 1/15, 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: Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.
Answer Choices:
a. True
b. False
Answer: a. True
Question: If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC) and cause a deterioration in its cash position.
Answer Choices:
a. True
b. False
Answer: b. False
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.
Answer Choices:
a. True
b. False
Answer: False
Question: Which of the following is NOT one of the steps taken in the financial planning process?
Answer Choices:
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. 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.
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.
Answer Choices:
a. True
b. False
Answer: False
Question: The four primary elements in a firm’s credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Spontaneously generated funds are generally defined as follows:
Answer Choices:
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. 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.
Question: Which of the following is NOT a key element in strategic planning as it is described in the text?
Answer Choices:
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.
Answer: c. The statement of cash flows.
Question: 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.
Answer Choices:
a. True
b. False
Answer: True
Question: Accruals arise automatically from a firm’s operations and are “free” capital in the sense that no explicit interest must normally be paid on accrued liabilities.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.
Answer Choices:
a. True
b. False
Answer: a. True
Question: 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.
Answer Choices:
a. True
b. False
Answer: True
Question: Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Shorter-term cash budgets (such as a daily cash budget for the next month) are generally used for actual cash control while longer-term cash budgets (such as a monthly cash budgets for the next year) are generally used for planning purposes.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
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.
Answer Choices:
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.
Answer: 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.
Question: To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.
Answer Choices:
a. True
b. False
Answer: True
Question: Which of the following assumptions is embodied in the AFN equation?
Answer Choices:
a. All balance sheet accounts are tied directly to sales.
b. Accounts payable and accruals are tied directly to sales.
c. Common stock and long-term debt are tied directly to sales.
d. Fixed assets, but not current assets, are tied directly to sales.
e. Last year’s total assets were not optimal for last year’s sales.
Answer: b. Accounts payable and accruals are tied directly to sales.
Question: The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm’s lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.
Answer Choices:
a. True
b. False
Answer: a. True
Question: If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm’s CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.
Answer Choices:
a. True
b. False
Answer: a. True