Question 1

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)   $91.16

Question 2

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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.

Accepted Answer

A) True 
 B)False

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.

Question 6

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)   4.14

Question 7

Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company 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

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.

Question 9

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.

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

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 12

Clayton Industries is planning its operations for next year. Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN) . 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 13

Spontaneously generated funds are generally defined as follows:

Accepted Answer

A)   Assets required per dollar of sales.
B)   A forecasting approach in which the forecasted percentage of sales for each item 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. D

Question 14

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.

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

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)   $379.8 A

Question 17

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

Question 18

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 19

Which of the following statements is CORRECT?

Accepted Answer

A)   The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.
B)   If a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's AFN to be negative.
C)   If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual AFN must, mathematically, exceed the previously calculated AFN.
D)   Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
E)   Dividend policy does not affect the requirement for external funds based on the AFN equation.

Question 20

Kamath-Meier Corporation's CFO uses this equation, which was developed by regressing inventories on sales over the past 5 years, to forecast inventory requirements: Inventories = $22.0 + 0.125(Sales) . The company expects sales of $400 million during the current year, and it expects sales to grow by 30% next year. What is the inventory forecast for next year? All dollars are in millions.

Accepted Answer

A)   $74.6
B)   $78.5
C)   $82.7
D)   $87.0
E)   $91.4

Exam 6: Forecasting

Correct Answer
verified

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.

Correct Answer
verified

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

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.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

Correct Answer
verified

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

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

Correct Answer
verified

Correct Answer
verified

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
True

Clayton Industries is planning its operations for next year. Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN) . 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.

Correct Answer
verified

Spontaneously generated funds are generally defined as follows:

Correct Answer
verified
D

Which of the following statements is CORRECT?

Correct Answer
verified

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.

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
A

Correct Answer
verified

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.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Exam 6: Forecasting

Correct AnswerverifiedShow Answer

When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.

Correct AnswerverifiedShow Answer

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

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

Correct AnswerverifiedShow Answer

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 AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 AnswerverifiedTrue

Clayton Industries is planning its operations for next year. Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN) . 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.

Correct AnswerverifiedShow Answer

Spontaneously generated funds are generally defined as follows:

Correct AnswerverifiedD

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

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 AnswerverifiedA

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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True

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D

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A

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