Chapter 11
Financial Planning and Forecasting Financial Statements
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1. Holding other things constant, the additional funds required for financing a firm's operations would be increased with an increase in a firm's
a. Dividend payout ratio.
b. Profit margin.
c. Total asset turnover.
d. Spontaneous liabilities.
e. Accruals.

2. Which of the following statements is most correct?
a. Other things held constant, a firm that has a positive growth rate in sales and has positive AFN will be able to increase its payout ratio, without also increasing its AFN.
b. If the capital intensity ratio is high, then sales can grow rapidly without much outside capital.
c. DAG Company has a low profit margin and pays out 100 percent of its earnings. Thus, if DAG's sales grow, it will not need to finance that growth with outside capital.
d. Dividends are considered in the AFN formula method and in the constant ratio method.
e. The profit margin term found in the AFN formula method is not represented, nor is the profit margin concept relevant, in the constant ratio method.

3. You are the owner of a small business which has the following balance sheet:

Current assets $10,000 Accounts payable $ 2,500
Net fixed assets   20,000 Accruals 2,500
    Long-term debt 10,000
    Common equity  15,000
Total assets $30,000 Total liab. and equity $30,000


Fixed and current assets are fully utilized, and the sales/assets and sales/spontaneous liabilities ratios will remain constant. Next year you expect sales to increase by 50 percent. You also expect to retain $2,250 of next year's earnings within the firm. What is next year's additional external funding requirement, i.e., what is your firm's AFN?
a. No additional funds are required.
b. $10,250
c. $15,000
d. $17,250
e. The answer depends on this year's sales level.

4. Gray Ventures' balance sheet is presented below. Use the AFN formula approach to determine the amount of growth that Gray Ventures could experience without needing additional (external) funds. Current sales are $10,000, the profit margin is 8 percent, and the dividend payout ratio is 30 percent. Assume that the firm is currently operating at full capacity.

Cash $   40 Accounts payable $  100
Accounts receivable 110 Notes payable 50
Inventory 250 Mortgage bonds 300
Net fixed assets     600 Common stock 150
    Retained earnings     400
Total assets $1,000 Total liabilities and equity $1,000

 
a. 0.0%
b. 2.4%
c. 5.8%
d. 6.6%
e. 8.5%

5. Which of the following are ways that managers can use pro forma financial statements?
a. To investigate the impact of proposed changes in strategy and operations.
b. To assess whether the firm's anticipated performance is in line with their own targets and with shareholder's expectations.
c. To estimate future free cash flows.
d. All of the above are correct.
e. None of the above are correct.

6. Which of the following statements is most correct, regarding a forecast with constant ratios and a constant capital structure?
a. An increase in market interest rates would lead to an increased profit margin.
b. All components of common equity grow at the same rate as the sales rate of growth.
c. As a firm grows, you will observe a greater accumulation of fixed assets compared to current assets.
d. The most static variable in determining the additional funds needed is addition to retained earnings, which is determined by the income statement.
e. All of the above are correct.

7. All else equal, which of the following conditions would lead to an increase in the additional funds needed?
a. An increase of the total assets turnover ratio.
b. A decrease in projected sales.
c. An increase in spontaneous liabilities.
d. An increase in the profit margin.
e. A decrease in the retention ratio.

8. Which of the following statements is most correct?
a. Lumpy assets are assets that cannot be acquired smoothly and require large, discrete additions.
b. Financing feedbacks can be described as the effects on the income statement and balance sheet of actions taken to finance increases in assets.
c. Simple linear regression is used to estimate how specific balance sheet items vary with sales. The process involves regressing expected account levels against predicted sales figures.
d. Both A and B are correct.
e. All of the above are correct.

9. All else equal, which of the following conditions would lead to a decrease in the additional funds needed?
a. An increase of the dividend payout ratio.
b. Accounts payable increase slower than sales.
c. The firm has a lot of excess capacity.
d. All of the above are correct.
e. None of the above are correct.

10. Suppose a firm had the following financial data:

Cash $  500   Spont. Liab. $  500
Accts. Rec. 300   Notes Pay. 350
Inventory     200   Current Liab. 850
Current Assets $1,000   Long-Term Debt 400
Fixed Assets     750   Common Equity     500
Total Assets $1,750   Total Liab. and Equity $1,750


The firm experienced a profit margin of 5% on $4,000 of sales last year. Next year, they are predicting a 25% increase in revenues. If the firm follows its usual payout policy of 40%, what are the additional funds needed for this firm?
a. $132.5
b. $162.5
c. $192.5
d. $212.5
e. $232.5


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