Question 1

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) A) and D)
G) A) and E)

Question 2

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 B)
G) B) and D)

Question 3

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.F) C) and D)
G) B) and E)

Question 4

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 D)
G) A) and C)

Question 5

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 E)
G) A) and B)

Question 6

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 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%F) A) and B)
G) A) and C)

Question 8

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) A) and B)
G) B) and C)

Question 9

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 10

Which of the following statements is CORRECT?

Accepted Answer

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.F) A) and B)
G) A) and D)

Question 11

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 12

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 E)
G) None of the above

Question 13

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) B) and D)
G) B) and C)

Question 14

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 15

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.

Accepted Answer

A) True 
 B)False

Question 16

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

Exam 16: Financial Planning and Forecasting

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

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

Spontaneously generated funds are 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

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

Correct Answer
verified

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

Correct Answer
verified

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.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

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.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

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

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

Exam 16: Financial Planning and Forecasting

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

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 AnswerverifiedShow Answer

Spontaneously generated funds are 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

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

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

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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

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