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Exam 5: Financial Planning and Forecasting Financial Statements

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Question 1

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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 increases its dividend payout ratio.
B) The company begins to pay employees monthly rather than weekly.
C) The company's profit margin increases.
D) The company decides to stop taking discounts on purchased materials.

E) A) and B)
F) None of the above

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Question 2

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If a firm's capital intensity ratio (A*/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

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Question 3

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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?

Suppose a firm has net income of $8 on sales of $40, fixed assets of $75, and total assets of $90. The firm retains 50% of its earnings. If the firm is operating at 80% capacity, what are the full capacity sales?

Suppose a firm with a positive net worth is operating its fixed assets at full capacity, its dividend payout ratio is 100%, and it wants to hold all financial ratios constant. Then, for any positive growth rate in sales, it will require external financing.

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.

Which of the following is not an issue in the process of the FFS method?

Which of the following defines the term "additional funds needed (AFN) "?

Which of the following defines the capital intensity ratio?

ABC Co. is planning its operations for next year, and 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.

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?

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?

Which of the following statements is correct?

Last year Wei Guan Inc. had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity. In millions, by how much could Wei Guan's sales increase before it is required to increase its fixed assets?

Chua Chang & Wu Inc. is planning its operations for next year, and 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?

By developing a financial plan, a firm benefits by being forced to think about and forecast the future, set goals and establish priorities, and make sure that goals are internally consistent.

Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its FA/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 FA/Sales ratio should the company set?

When a firm wants to maintain its ratios at their existing levels, if it has a positive sales growth rate of any amount, it will require some amount of external funding.

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.

Which of the following relationships describes a situation of very large increases in sales requiring very little additional inventory?