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Exam 12: Forecasting

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Question 21

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Which of the following statements is CORRECT?

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 liabilities are far more than sufficient to finance the additional assets needed.
E) If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method.

F) C) and E)
G) C) and D)

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Question 22

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Which of the following statements is CORRECT?

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

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Question 23

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

Which of the following statements is CORRECT?

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

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 well-being of the firm.

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 (AFN) ?

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?

Which of the following statements is CORRECT?

Chang & Wu Inc.is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed The firm is operating at full capacity.Data for use in your forecast are shown below.Based on the AFN equation, what is the AFN for the coming year? $\begin{array}{l}\begin{array} {llll} \text { Last year's sales }=\$ 0 && \$ 200,000 &\text { Last year's accounts }\\\text { payable } & \$ 50,000\\\text { Sales growth rate =g }&&40 \%&\text { Last year's notes}\\\text { payable } & \$ 15,000\\\text {Last year's total assets =A*0}&& \$135,000 &\text {Last year's}\\\text {accruals}&\$20,000\\\text { Last year's profit margin=M} &&20.0 \%& \text { Target payout }\\\text { ratio }* 25.0 \%\\\end{array}\end{array}$

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.

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.

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

capital intensity ratio is generally defined as follows:

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.

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.

Operating plans sketch out broad approaches for realization of the firm's strategic vision.These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.

year Emery Industries had $450 million of sales and $225 million of fixed assets, 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?

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?

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.