Question 1

In your internship with Lewis,Lee,& Taylor Inc.you have been asked to forecast the firm's additional funds needed (AFN) for next year.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?   Last year’s sales =S0$200,000 Last year’s accounts payable $50,000 Sales growth rate =g40% Last year’s notes payable $15,000 Last year’s total assets =A0∗$135,000 Last year’s accruals $20,000 Last year’s profit margin = PM 20.0% Target payout ratio 25.0%\begin{array}{lrlr}	ext { Last year&#x27;s sales }=S_{0} & \$ 200,000 & 	ext { Last year&#x27;s accounts payable } & \$ 50,000 \	ext { Sales growth rate }=g & 40 \% & 	ext { Last year&#x27;s notes payable } & \$ 15,000 \	ext { Last year&#x27;s total assets }=\mathrm{A}_{0} * & \$ 135,000 & 	ext { Last year&#x27;s accruals } & \$ 20,000 \	ext { Last year&#x27;s profit margin }=	ext { PM } & 20.0 \% & 	ext { Target payout ratio } & 25.0 \%\end{array} Last year’s sales =S0​ Sales growth rate =g Last year’s total assets =A0​∗ Last year’s profit margin = PM ​$200,00040%$135,00020.0%​ Last year’s accounts payable  Last year’s notes payable  Last year’s accruals  Target payout ratio ​$50,000$15,000$20,00025.0%​

Accepted Answer

A)   -$14,440
B)  -$15,200
C)   -$16,000
D)   -$16,800
E)  -$17,640 F) A) and D)
G) None of the above

Question 2

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 3

Last year Baron Enterprises had $350 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions,by how much could Baron's sales increase before it is required to increase its fixed assets?

Accepted Answer

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

Question 4

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 5

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

Accepted Answer

A) True 
 B)False

Question 6

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.F) A) and B)
G) A) and E)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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.F) A) and E)
G) A) and D)

Question 9

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 10

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.F) B) and E)
G) A) and D)

Question 11

The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.

Accepted Answer

A) True 
 B)False

Question 12

Two firms with identical capital intensity ratios are generating the same amount of sales.However,Firm A is operating at full capacity,while Firm B is operating below capacity.If the two firms expect the same growth in sales during the next period,then Firm A is likely to need more additional funds than Firm B,other things held constant.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
C)   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.
D)   If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
E)   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.F) A) and D)
G) A) and C)

Question 14

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

Accepted Answer

A)   Accounts payable and accruals are tied directly to sales.
B)   Common stock and long-term debt are tied directly to sales.
C)   Fixed assets, but not current assets, are tied directly to sales.
D)   Last year's total assets were not optimal for last year's sales.
E)   None of the firm's ratios will change.F) B) and C)
G) C) and E)

Question 15

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

Question 16

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 17

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 sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
D)   The company discovers that it has excess capacity in its fixed assets.
E)   A sharp increase in its forecasted sales.F) B) and D)
G) All of the above

Question 18

The AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time.However,this assumption can be relaxed when we use the forecasted financial statement method.Three conditions where constant ratios cannot be assumed are economies of scale,lumpy assets,and excess capacity.

Accepted Answer

A) True 
 B)False

Question 19

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.F) A) and D)
G) B) and E)

Question 20

A 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.

Accepted Answer

A) True 
 B)False

Exam 12: Corporate Valuation and Financial Planning

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The capital intensity ratio is generally defined as follows:

Correct Answer
verified

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

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
verified

Correct Answer
verified

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
verified

Last year Baron Enterprises had $350 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions,by how much could Baron's sales increase before it is required to increase its fixed assets?

Correct Answer
verified

Correct Answer
verified

Spontaneous funds are generally defined as follows:

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

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

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

Correct Answer
verified

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
verified

The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.

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

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
verified

Exam 12: Corporate Valuation and Financial Planning

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The capital intensity ratio is generally defined as follows:

Correct AnswerverifiedShow Answer

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

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 AnswerverifiedShow Answer

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

Last year Baron Enterprises had $350 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions,by how much could Baron's sales increase before it is required to increase its fixed assets?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Spontaneous funds are generally defined as follows:

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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 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

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

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

The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.

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

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

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