True/False
Easy:
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
Medium:
(14.3) Additional funds needed Answer: a MEDIUM
11
. 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
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
Easy:
(14.1) Strategic planning Answer: c EASY
18
. Which of the following is NOT a key element in strategic planning as it
is described in the text?
Easy/Medium:
(14.3) Additional funds needed Answer: a EASY/MEDIUM
20
. 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)?
Medium:
(14.1) Financial planning Answer: e MEDIUM
23
. Which of the following is NOT one of the steps taken in the financial
planning process?
a. Perhaps the most important step when developing pro forma 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. Pro forma 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 method produces more accurate forecasts than the
forecasted financial statement method, especially if fixed assets
are lumpy and economies of scale exist.
a. The company previously thought its fixed assets were being operated
at full capacity, but now it learns that it actually has excess
capacity.
b. The company increases its dividend payout ratio.
c. The company begins to pay employees monthly rather than weekly.
d. The company’s profit margin increases.
e. The company decides to stop taking discounts on purchased
materials.
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.
b. A firm’s corporate purpose states the general philosophy of the
business and provides managers with specific operational
objectives.
c. Operating plans provide detailed guidance, consistent with the
corporate strategy, to help operating managers 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.
a. When we use the AFN formula, we assume that the ratios of assets
and liabilities to sales (A*/S0 and L*/S0) vary from year to year in
a stable, predictable manner.
b. 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.
c. Firms whose fixed assets are “lumpy” frequently have excess
capacity, and this should be accounted for in the financial
forecasting process.
d. For a firm that uses lumpy assets, it is impossible to have small
increases in sales without expanding fixed assets.
e. A graph showing the relationship between assets and sales is always
linear if economies of scale exist.
Easy:
(14.4) Forecasting inventories--regression analysis Answer: d EASY
32
. Kamath-Meier Corporation's CFO uses this equation, which was developed
by regressing inventories on sales over the past 5 years, to forecast
inventory requirements: Inventories = $22.0 + 0.125(Sales). The
company expects sales of $400 million during the current year, and it
expects sales to grow by 30% next year. What is the inventory forecast
for next year? All dollars are in millions.
a. $74.6
b. $78.5
c. $82.7
d. $87.0
e. $91.4
a. $312.5
b. $328.1
c. $344.5
d. $361.8
e. $379.8
a. 3.40
b. 3.57
c. 3.75
d. 3.94
e. 4.14
a. $170.1
b. $179.0
c. $188.5
d. $197.9
e. $207.8
a. 54.30%
b. 57.16%
c. 60.17%
d. 63.33%
e. 66.67%
a. 28.5%
b. 30.0%
c. 31.5%
d. 33.1%
a. $102.8
b. $108.2
c. $113.9
d. $119.9
e. $125.9
a. -$14,440
b. -$15,200
c. -$16,000
d. -$16,800
e. -$17,640
a. $31.9
b. $33.6
c. $35.3
d. $37.0
e. $38.9
Hard:
(14.5) Finding the target fixed assets/sales ratio Answer: b HARD
41
. Last 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?
a. $74.81
b. $78.75
c. $82.69
d. $86.82
e. $91.16
Answer a is obviously correct. Also, note that with purchase terms of 1/5 net 90, the nominal cost of non-free trade
credit is only 4.28%, whereas with 3/15, net 35, the nominal cost of trade credit is over 56%. Therefore, the firm
should have been taking discounts originally, hence should have had few accounts payable, whereas it would
probably not take discounts and thus have more accounts payable with the new supplier. That change would lower
its AFN.
Sales $250.0
Fixed assets $75.0
% of capacity utilized 80.0%
Sales $350
Fixed assets (not used in calculations) $270
% of capacity utilized 65%
Sales $850
Fixed assets (not used in calculations) $425
% of capacity utilized 60%
Sales at full capacity = Actual sales/% of capacity used = $1,417
Additional sales without adding FA = full capacity sales – actual sales = $567
Percent growth in sales = additional sales/old sales = 66.67%
37. (14.5) Finding the target fixed assets/sales ratio Answer: b MEDIUM
Sales $250
Fixed assets $100
% of capacity utilized 75%
41. (14.5) Finding the target fixed assets/sales ratio Answer: b HARD
Sales $450
Fixed assets $225
% of capacity utilized 65%