Financial Planning and Forecasting

CHAPTER 17

FINANCIAL PLANNING AND FORECASTING

(Difficulty: E = Easy, M = Medium, and T = Tough)

Multiple Choice: Conceptual

Easy:

Percent of sales method Answer: e Diff: E

. The percent of sales method is based on which of the following assumptions?

a. All balance sheet accounts are tied directly to sales.

b. Most balance sheet accounts are tied directly to sales.

c. The current level of total assets is optimal for the current sales level.

d. Statements a and c above are correct.

e. Statements b and c above are correct.

Additional funds needed Answer: b Diff: E

. A company is forecasting an increase in sales and is using the AFN model to forecast the additional capital that they need to raise. Which of the following factors are likely to increase the additional funds needed (AFN)?

a. The company has a lot of excess capacity.

b. The company has a high dividend payout ratio.

c. The company has a lot of spontaneous liabilities that increase as sales increase.

d. The company has a high profit margin.

e. All of the statements above are correct.

Additional funds needed Answer: e Diff: E

. Jefferson City Computers has developed a forecasting model to determine the additional funds it needs in the upcoming year. All else being equal, which of the following factors is likely to increase its additional funds needed (AFN)?

a. A sharp increase in its forecasted sales and the company's fixed assets are at full capacity.

b. A reduction in its dividend payout ratio.

c. The company reduces its reliance on trade credit that sharply reduces its accounts payable.

d. Statements a and b are correct.

e. Statements a and c are correct.

Additional funds needed Answer: c Diff: E

. Which of the following is likely to increase the additional funds needed (AFN) in a given year?

a. The company reduces its dividend payout ratio.

b. The company's profit margin increases.

c. The company decides to reduce its reliance on accounts payable as a form of financing.

d. The company is operating well below full capacity.

e. All of the statements above are correct.

Additional funds needed Answer: a Diff: E

. All else equal, which of the following is likely to increase a company's additional funds needed (AFN)?

a. An increase in its dividend payout ratio.

b. The company has a lot of excess capacity.

c. Accounts payable increase faster than sales.

d. All of the statements above are correct.

e. None of the statements above is correct.

Additional funds needed Answer: b Diff: E N

. Additional funds needed are best defined as:

a. Funds that are obtained automatically from routine business transactions.

b. Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.

c. The amount of assets required per dollar of sales.

d. The amount of cash generated 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. A forecasting approach in which the forecasted percentage of sales for each item is held constant.

Additional funds needed Answer: e Diff: E N

. Which of the following is likely to decrease the additional funds needed (AFN) in a given year?

a. The company increases its retention ratio.

b. The company's profit margin increases.

c. The company's sales growth is reduced.

d. Both statements b and c are correct.

e. All of the statements above is correct.

Forecasting concepts Answer: b Diff: E

. Which of the following statements is most correct?

a. One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with net income.

b. The first, and most critical, step in constructing a set of pro forma financial statements is establishing the sales forecast.

c. Pro forma financial statements as discussed in the text are used primarily to assess a firm's historical performance.

d. The capital intensity ratio reflects how rapidly a firm turns over its assets and is the reciprocal of the fixed assets turnover ratio.

e. The percent of sales method produces accurate results when fixed assets are lumpy and when economies of scale are present.

Strategic plans and corporate scope Answer: e Diff: E N

. Which of the following statements is most correct?

a. A mission statement is a condensed version of a firm's strategic plans.

b. Both mission statements and strategic plans usually begin with a statement of the overall corporate purpose.