CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
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.
Difficulty: Challenging
INTE.GENE.16.62 – LO: 9-6
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
United States – OH – Default City – TBA
Additional funds needed
TYPE: Multiple Choice: Conceptual
31. Which of the following statements is CORRECT?
a.
The AFN equation for forecasting funds requirements requires only a forecast of the firm’s balance sheet.
Although a forecasted income statement may help clarify the results, income statement data are not essential
because funds needed relate only to the balance sheet.
b.
Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy
does not affect the AFN forecast.
c.
A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to
finance the additional assets needed.
d.
If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN
equation will provide more accurate forecasts than the forecasted financial statements method.
e.
Any forecast of financial requirements involves determining how much money the firm will need, and this
need is determined by adding together increases in assets and spontaneous liabilities and then subtracting
operating income.
Difficulty: Challenging
INTE.GENE.16.62 – LO: 9-6
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
Additional funds needed
TYPE: Multiple Choice: Conceptual
32. Which of the following statements is CORRECT?
a.
If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
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.
e
Difficulty: Challenging
INTE.GENE.16.62 – LO: 9-6
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
AFN equation
TYPE: Multiple Choice: Conceptual
33. Which of the following statements is CORRECT?
a.
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.
b.
Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in the
financial forecasting process.
c.
For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed
assets.
d.
There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to
remain constant over time as the size of the firm increases. The Economic Ordering Quantity model for
establishing inventory levels demonstrates this relationship.
e.
When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0)
vary from year to year in a stable, predictable manner.
Difficulty: Challenging
INTE.GENE.16.66 – LO: 9-7
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
Forecasting financial reqs.
TYPE: Multiple Choice: Conceptual
34. The Besnier Company had $250 million of sales last year, 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?
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
a.
$312.5
b.
$328.1
c.
$344.5
d.
$361.8
e.
$379.8
a
35. 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?
a.
$170.09
b.
$179.04
c.
$188.46
d.
$197.88
e.
$207.78
c
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
36. North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only
60% of capacity. What is the maximum sales growth rate North 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%
e
37. Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of
fixed assets. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial
forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the
level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?
a.
28.5%
b.
30.0%
c.
31.5%
d.
33.1%
e.
34.7%
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
38. Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company’s operations next year, and he
wants you to forecast the firm’s additional funds needed (AFN). 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? Dollars are in millions.
Last year’s sales = S0
$350
Last year’s accounts payable
$40
Sales growth rate = g
30%
Last year’s notes payable
$50
Last year’s total assets = A0*
$500
Last year’s accruals
$30
Last year’s profit margin = PM
5%
Target payout ratio
60%
a.
$102.8
b.
$108.2
c.
$113.9
d.
$119.9
e.
$125.9
Difficulty: Challenging
INTE.GENE.16.62 – LO: 9-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Positive AFN
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Finding target FA/S ratio
TYPE: Multiple Choice: Problem
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
39. 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 = g
40%
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%
a.
−$14,440
b.
−$15,200
c.
−$16,000
d.
−$16,800
e.
−$17,640
Difficulty: Challenging
INTE.GENE.16.62 – LO: 9-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Negative AFN
TYPE: Multiple Choice: Problem
40. You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW),
which is planning its operation for the coming year. The firm is operating at full capacity. 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?
TYPE: Multiple Choice: Problem
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
All dollars are in millions.
Last year’s sales = S0
$300.0
Last year’s accounts payable
$50.0
Sales growth rate = g
40%
Last year’s notes payable
$15.0
Last year’s total assets = A0*
$500.0
Last year’s accruals
$20.0
Last year’s profit margin = PM
20.0%
Initial payout ratio
10.0%
a.
$31.9
b.
$33.6
c.
$35.3
d.
$37.0
e.
$38.9
Difficulty: Challenging
INTE.GENE.16.62 – LO: 9-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
AFN–changing div. payout
TYPE: Multiple Choice: Problem
41. Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, 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
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
d.
$86.82
e.
$91.16
Difficulty: Challenging
INTE.GENE.16.66 – LO: 9-7
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
Finding target FA/S ratio
TYPE: Multiple Choice: Problem
These are the simplified financial statements for Judd Enterprises.
Income statement
Current
Projected
Sales
na
1,000
Costs
na
700
Profit before tax
na
300
Taxes
na
90
Net income
na
210
Dividends
na
63
Balance sheets
Current
Projected
Current
Projected
Current assets
100
115
Current liabilities
70
81
Net fixed assets
900
1,080
Long-term debt
400
Common stock
300
Retained earnings
230
42. Refer to the Judd Enterprises financial statements. What is Judd’s projected retained earnings under this plan?
a.
$339
b.
$377
c.
$396
d.
$415
e.
$440
Difficulty: Moderate
INTE.GENE.16.65 – LO: 9-4
United States – BUSPROG: Analytic
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
43. Refer to the Judd Enterprises financial statements. If Judd does not plan on issuing new stock or additional long-term
debt, then what is the additional net financing needed for the projected year?
a.
$30
b.
$33
c.
$37
d.
$339
e.
$396
c
Difficulty: Challenging
INTE.GENE.16.65 – LO: 9-4
United States – BUSPROG: Analytic
United States – TN – DISC: Financial statements, anal – DISC: Financial statements, analysis,
United States – OH – Default City – TBA
Projecting financial statements
TYPE: Multiple Choice: Problem
Below are the simplified current and projected financial statements for Decker Enterprises.
All of Decker’s assets are operating assets. All of Decker’s current liabilities are operating
liabilities.
Income statement
Current
Projected
Sales
na
1,500
Costs
na
1,050
Profit before tax
na
450
Taxes
na
135
Net income
na
315
Dividends
na
95
Balance sheets
Current
Projected
Current
Projected
Current assets
100
115
Current liabilities
70
81
Net fixed assets
1,200
1,440
Long-term debt
300
360
Common stock
500
500
Retained earnings
430
650
44. Based on the projections, Decker will have
a.
a financing surplus of $36
b.
a financing deficit of $36
c.
a financing surplus of $255
d.
a financing deficit of $255
e.
zero financing surplus or deficit
United States – TN – DISC: Financial statements, anal – DISC: Financial statements, analysis,
United States – OH – Default City – TBA
Projecting financial statements
TYPE: Multiple Choice: Problem
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING
Difficulty: Moderate
INTE.GENE.16.65 – LO: 9-4
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Financing surplus/deficit
TYPE: Multiple Choice: Problem
45. If Decker had a financing surplus, it could remedy the situation by
a.
borrowing on its line of credit.
b.
issuing more common stock.
c.
reducing its dividend.
d.
borrowing from its retained earnings
e.
paying a special dividend
Difficulty: Moderate
INTE.GENE.16.65 – LO: 9-4
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Financing surplus/deficit
TYPE: Multiple Choice: Conceptual
46. If Decker had a financing deficit, it could remedy the situation by
a.
buying back common stock
b.
paying a special dividend
c.
paying down its long-term debt
d.
borrowing on its line of credit
e.
borrowing from retained earnings
Difficulty: Moderate
INTE.GENE.16.65 – LO: 9-4
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Financing surplus/deficit
CHAPTER 9—CORPORATE VALUATION AND FINANCIAL PLANNING