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Exam 5: Financial Planning and Forecasting Financial Statements

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Question 21

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Canada Manufacturing has net income of $18 on sales of $60,fixed assets of $95,and total assets of $190.The firm retains 50% of its earnings.If the firm is operating at 70% capacity,what are the full capacity sales?

A) $86
B) $84
C) $105
D) $172

E) B) and C)
F) A) and D)

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Question 22

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Last year Canada Corp.had $250 million of sales and $125 million of fixed assets,so its FA/Sales ratio was 50%.However,its fixed assets were used at only 65% 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?

A) 28.5%
B) 50.0%
C) 31.5%
D) 33.1%

E) A) and D)
F) A) and B)

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Question 23

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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.

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

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.

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? $\begin{array}{l}\begin{array}{lll} \text { Last year's sales = S0 } &\$ 200,000 \\ \text { Sales growth rate= g } &40 \% \\ \text { Last year's total assets =A 0 } & \$ 135,000 \\ \text { Last year's pro fit } \operatorname{margin}=\mathrm{MI} & 20.0 \% \\\end{array}\begin{array}{lll} \text { Last year's accounts payable } &\$ 50,000\\ \text { Last year's notes payable (to bank) } &\$ 15,000 \\ \text { Last year's accruals } & \$ 20,000 \\ \text { Target payout ratio } & 25.0 \% \\\end{array}\end{array}$

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?

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.

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.

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?

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

Last year Canada MasterCorp.had $10 million of sales and $7.5 million of fixed assets,so its FA/Sales ratio was 75%.However,its fixed assets were used at only 50% 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?

A Canadian firm has net income of $10 on sales of $50,fixed assets of $75,and total assets of $125.The firm retains 50% of its earnings.If the firm is operating at 90% capacity,what are the full capacity sales?

Which of the following statements is correct?

Which factors are used to determine the level of sales that a firm can generate without having to raise any external funds (self-supporting growth rate) ?

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?

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?

Other things being equal,firms pursuing which type of working capital strategy will need what type of long-term external financing?

Which of the following statements is correct?