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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 firm.

A) True
B) False

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False

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.

A) True
B) False

Correct Answer

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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?


A) 54.30%
B) 57.16%
C) 60.17%
D) 63.33%
E) 66.67%

F) B) and C)
G) B) and E)

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When we use the AFN equation to forecast the additional funds needed (AFN),we are implicitly assuming that all financial ratios are constant.If financial ratios are not constant,regression techniques can be used to improve the financial forecast.

A) True
B) False

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Which of the following statements is CORRECT?


A) Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
B) The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
C) Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management's historical performance is evaluated.
D) The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.
E) The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy and economies of scale exist.

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

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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.

A) True
B) False

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


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

F) A) and D)
G) A) and B)

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

A) True
B) False

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


A) All balance sheet accounts are tied directly to sales.
B) Accounts payable and accruals are tied directly to sales.
C) Common stock and long-term debt are tied directly to sales.
D) Fixed assets, but not current assets, are tied directly to sales.
E) Last year's total assets were not optimal for last year's sales.

F) B) and C)
G) None of the above

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A firm's profit margin is 5%,its debt 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.

A) True
B) False

Correct Answer

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False

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) ?


A) A sharp increase in its forecasted sales.
B) A sharp reduction in its forecasted sales.
C) The company reduces its dividend payout ratio.
D) The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
E) The company discovers that it has excess capacity in its fixed assets.

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

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Which of the following statements is CORRECT?


A) Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals.
B) A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
C) Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
D) A firm's mission statement defines its lines of business and geographic area of operations.
E) The corporate scope is a condensed version of the entire set of strategic plans.

F) A) and C)
G) B) and D)

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The capital intensity ratio is generally defined as follows:


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

F) None of the above
G) A) and C)

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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? 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? A) −$14,440 B) −$15,200 C) −$16,000 D) −$16,800 E) −$17,640


A) −$14,440
B) −$15,200
C) −$16,000
D) −$16,800
E) −$17,640

F) A) and C)
G) C) and D)

Correct Answer

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Clayton Industries is planning its operations for next year.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. ​ Clayton Industries is planning its operations for next year.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. ​ A) $102.8 B) $108.2 C) $113.9 D) $119.9 E) $125.9


A) $102.8
B) $108.2
C) $113.9
D) $119.9
E) $125.9

F) All of the above
G) C) and E)

Correct Answer

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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?


A) $312.5
B) $328.1
C) $344.5
D) $361.8
E) $379.8

F) C) and D)
G) A) and B)

Correct Answer

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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?


A) $170.09
B) $179.04
C) $188.46
D) $197.88
E) $207.78

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

Correct Answer

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Howton & Howton Worldwide (HHW) is planning its operations for the coming year,and the CEO wants you to forecast the firm's additional funds needed (AFN) .Data for use in the forecast are shown below.However,the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%,which the firm's investment bankers have recommended.Based on the AFN equation,by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. Howton & Howton Worldwide (HHW) is planning its operations for the coming year,and the CEO wants you to forecast the firm's additional funds needed (AFN) .Data for use in the forecast are shown below.However,the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%,which the firm's investment bankers have recommended.Based on the AFN equation,by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. A) $31.9 B) $33.6 C) $35.3 D) $37.0 E) $38.9


A) $31.9
B) $33.6
C) $35.3
D) $37.0
E) $38.9

F) B) and E)
G) All of the above

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.

A) True
B) False

Correct Answer

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True

The first,and most critical,step in constructing a set of forecasted financial statements is the sales forecast.

A) True
B) False

Correct Answer

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