Question 1

If Decker had a financing deficit,it could remedy the situation by

Accepted Answer

A)   buying back common stock
B)   paying a special dividend
C)   paying down its long-term debt
D)   borrowing on its line of credit
E)   borrowing from retained earnings D

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   Firms whose fixed assets are "lumpy" frequently have excess capacity,and this should be accounted for in the financial forecasting process.
C)   For a firm that uses lumpy assets,it is impossible to have small increases in sales without expanding fixed assets.
D)   There are economies of scale in the use of many kinds of assets.When economies occur the ratios are likely to remain constant over time as the size of the firm increases.The Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship.
E)   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.

Question 3

North Construction had $850 million of sales last year,and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North 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 4

Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital.Consequently,the firm should make arrangements with its suppliers to use as much of this credit as possible.

Accepted Answer

A) True 
 B)False  False

Question 5

The capital intensity ratio is generally defined as follows:

Accepted Answer

A)   The percentage of liabilities that increase spontaneously as a percentage of sales.
B)   The ratio of sales to current assets.
C)   The ratio of current assets to sales.
D)   The amount of assets required per dollar of sales,or A0*/S0.
E)   Sales divided by total assets,i.e. ,the total assets turnover ratio.

Question 6

Based on the projections,Decker will have

Accepted Answer

A)   a financing surplus of $36
B)   a financing deficit of $36
C)   a financing surplus of $255
D)   a financing deficit of $255
E)   zero financing surplus or deficit

Question 7

If Decker had a financing surplus,it could remedy the situation by

Accepted Answer

A)   borrowing on its line of credit.
B)   issuing more common stock.
C)   reducing its dividend.
D)   borrowing from its retained earnings
E)   paying a special dividend

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

Spontaneous funds are generally defined as follows:

Accepted Answer

A)   A forecasting approach in which the forecasted percentage of sales for each item is held constant.
B)   Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
C)   Funds that arise out of normal business operations from its suppliers,employees,and the government,and they include immediate increases in accounts payable,accrued wages,and accrued taxes.
D)   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.
E)   Assets required per dollar of sales.

Question 10

The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate.It can be calculated by using the AFN equation with AFN equal to zero and solving for g.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   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.
C)   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.
D)   Dividend policy does not affect the requirement for external funds based on the AFN equation.
E)   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.

Question 12

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 13

A firm will use spontaneous funds to the extent possible;however,due to credit terms,contracts with workers,and tax laws there is little flexibility in their usage.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)   Funds that a firm must raise externally from non-spontaneous sources,i.e. ,by borrowing or by selling new stock to support operations.
B)   The amount of assets required per dollar of sales.
C)   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.
D)   A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
E)   Funds that are obtained automatically from routine business transactions.

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

F.Marston,Inc.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) ?

Accepted Answer

A)   A switch to a just-in-time inventory system and outsourcing production.
B)   The company reduces its dividend payout ratio.
C)   The company switches its materials purchases to a supplier that offers a longer credit period (with all other terms held equal) .
D)   The company discovers that it has excess capacity in its fixed assets.
E)   A sharp increase in its forecasted sales. E

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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 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)   The company previously thought its fixed assets were being operated at full capacity,but now it learns that it actually has excess capacity.

Question 19

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 20

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.

Accepted Answer

A) True 
 B)False

Exam 12: Financial Planning and Applications to Corporate Valuation

If Decker had a financing deficit,it could remedy the situation by

Correct Answer
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D

Which of the following statements is CORRECT?

Correct Answer
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North Construction had $850 million of sales last year,and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

Correct Answer
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Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital.Consequently,the firm should make arrangements with its suppliers to use as much of this credit as possible.

Correct Answer
verified
False

The capital intensity ratio is generally defined as follows:

Correct Answer
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Based on the projections,Decker will have

Correct Answer
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If Decker had a financing surplus,it could remedy the situation by

Correct Answer
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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.

Correct Answer
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Spontaneous funds are generally defined as follows:

Correct Answer
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The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate.It can be calculated by using the AFN equation with AFN equal to zero and solving for g.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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

A firm will use spontaneous funds to the extent possible;however,due to credit terms,contracts with workers,and tax laws there is little flexibility in their usage.

Correct Answer
verified

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

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

F.Marston,Inc.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) ?

Correct Answer
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E

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.

Correct Answer
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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?

Correct Answer
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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
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Correct Answer
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Exam 12: Financial Planning and Applications to Corporate Valuation

If Decker had a financing deficit,it could remedy the situation by

Correct AnswerverifiedD

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

North Construction had $850 million of sales last year,and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

Correct AnswerverifiedShow Answer

Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital.Consequently,the firm should make arrangements with its suppliers to use as much of this credit as possible.

Correct AnswerverifiedFalse

The capital intensity ratio is generally defined as follows:

Correct AnswerverifiedShow Answer

Based on the projections,Decker will have

Correct AnswerverifiedShow Answer

If Decker had a financing surplus,it could remedy the situation by

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Spontaneous funds are generally defined as follows:

Correct AnswerverifiedShow Answer

The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate.It can be calculated by using the AFN equation with AFN equal to zero and solving for g.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

A firm will use spontaneous funds to the extent possible;however,due to credit terms,contracts with workers,and tax laws there is little flexibility in their usage.

Correct AnswerverifiedShow Answer

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

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

F.Marston,Inc.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) ?

Correct AnswerverifiedE

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.

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 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

Correct AnswerverifiedShow Answer

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D

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False

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E

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