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Exam 12: Corporate Valuation and Financial Planning

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Question 21

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A firm's AFN must come from external sources.Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.

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Question 22

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Judd Enterprises These are the simplified financial statements for Judd Enterprises. $\begin{array}{llcc} \text { Income statement } & \text {Current} &\text {Projected} \\ \text { Sales } &\text {na}&1,000\\ \text { Costs } &\text {na}&\underline{720}\\ \text {Profit before tax } &\text {na}&280\\ \text {Taxes (25\%) } & \text {na}&\underline{70} \\ \text {Net income } & \text {na}&210\\ \text { Dividends } &\text {na}&63 \\\\ \text { Balance sheets } & \text {Current}&\text {Projected}&&\text {Current}&\text {Projected}\\ \text { Current assets } &100&115&\text {Current liabilities}&70&\\ \text { Net fixed assets } &900&1,080&\text {Long-term debt}&400&\\ \text { } &&&\text {Common stock}&300&\\&&&\text {Retained earnings}&230&\end{array}$ -Refer to the Judd Enterprises financial statements.What is Judd's projected retained earnings under this plan?

A) $339
B) $377
C) $396
D) $415
E) $440

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Question 23

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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?

Which of the following statements is CORRECT?

One of the first steps in arriving at a firm's forecasted financial statements is a review of industry-average operating ratios relative to these same ratios for the firm to determine whether changes to the ratios need to be made.

Decker Enterprises Below are the simplified current and projected financial statements for Decker Enterprises. All of Decker's assets are operating assets. All of Decker's current liabilities are operating liabilities. $\begin{array}{l}\begin{array} { l c r } \text { Income statement } & \text { CurrentProjected } \\\text { Sales } & \text { na } & 1,500 \\\text { Costs } & \text { na } &\underline{ 1,080} \\\cline { 2 - 3 } \text { Profit before tax } & \text { na } & 420 \\\text { Taxes } ( 25 \% ) & \text { na } & \underline{105 }\\\cline { 2 - 3 } \text { Net income } & \text { na } & 315 \\\text { Dividends } & \text { na } & 95\end{array}\\\begin{array} { l c r l r r } \text { Balance sheets } & \text { Current } & \text { Projected } & & \text { Current } & \text { Projected } \\\text { Current assets } & 100 & 115 & \text { Current liabilities } & 70 & 81 \\\text { Net fixed assets } & 1,200 & 1,440 & \text { Long-term debt } & 300 & 360 \\& & & \text { Common stock } & 500 & 500 \\& & & \text { Retained earnings } & 430 & 650\end{array}\end{array}$ -Based on the projections, Decker will have

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.

Which of the following is NOT one of the steps taken in the financial planning process?

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, spontaneous liabilities that reduce AFN arise from transactions brought on by sales increases.

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.

Which of the following assumptions is embodied in the AFN equation?

Below are the simplified current and projected financial statements for Decker Enterprises. All of Decker's assets are operating assets. All of Decker's current liabilities are operating liabilities. $\begin{array}{l}\begin{array} { l c r } \text { Income statement } & \text { CurrentProjected } \\\text { Sales } & \text { na } & 1,500 \\\text { Costs } & \text { na } &\underline{ 1,080} \\\cline { 2 - 3 } \text { Profit before tax } & \text { na } & 420 \\\text { Taxes } ( 25 \% ) & \text { na } & \underline{105 }\\\cline { 2 - 3 } \text { Net income } & \text { na } & 315 \\\text { Dividends } & \text { na } & 95\end{array}\\\begin{array} { l c r l r r } \text { Balance sheets } & \text { Current } & \text { Projected } & & \text { Current } & \text { Projected } \\\text { Current assets } & 100 & 115 & \text { Current liabilities } & 70 & 81 \\\text { Net fixed assets } & 1,200 & 1,440 & \text { Long-term debt } & 300 & 360 \\& & & \text { Common stock } & 500 & 500 \\& & & \text { Retained earnings } & 430 & 650\end{array}\end{array}$ -If Decker had a financing surplus, it could remedy the situation by

Which of the following statements is CORRECT?

Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets.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?

Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital.For example, just-in-time inventory systems, multiple shifts for labor, and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.

Judd Enterprises These are the simplified financial statements for Judd Enterprises. $\begin{array}{llcc} \text { Income statement } & \text {Current} &\text {Projected} \\ \text { Sales } &\text {na}&1,000\\ \text { Costs } &\text {na}&\underline{720}\\ \text {Profit before tax } &\text {na}&280\\ \text {Taxes (25\%) } & \text {na}&\underline{70} \\ \text {Net income } & \text {na}&210\\ \text { Dividends } &\text {na}&63 \\\\ \text { Balance sheets } & \text {Current}&\text {Projected}&&\text {Current}&\text {Projected}\\ \text { Current assets } &100&115&\text {Current liabilities}&70&\\ \text { Net fixed assets } &900&1,080&\text {Long-term debt}&400&\\ \text { } &&&\text {Common stock}&300&\\&&&\text {Retained earnings}&230&\end{array}$ -Refer to the Judd Enterprises financial statements.If Judd does not plan on issuing new stock or additional long-term debt, then what is the additional net financing needed for the projected year?

Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence, they have a greater need for external financing.There are currently no alternatives for these types of firms to lower their asset requirements.

Weber Interstate Paving Co.had $450 million of sales and $225 million of fixed assets last year, so its FA/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?

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

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.