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Exam 17: Financial Planning and Forecasting

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Question 21

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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) ?

A) A sharp increase in its forecasted sales.
B) A sharp reduction in its forecasted sales.
C) The company reduces its dividend payout ratio.
D) 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.
E) The company discovers that it has excess capacity in its fixed assets.

F) A) and D)
G) A) and C)

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Question 22

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Fairchild Garden Supply expects $700 million of sales this year,and it forecasts a 15% increase for next year.The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.25(Sales) .All dollars are in millions.What is the projected inventory turnover ratio for the coming year?

A) 2.78 times
B) 2.82 times
C) 4.35 times
D) 3.79 times
E) 3.48 times

F) B) and D)
G) C) and D)

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Question 23

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Which of the following is NOT a key element in strategic planning as it is described in the text?

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

Last year Jain Technologies had $250 million of sales and $100 million of fixed assets,so its Fixed Assets/Sales ratio was 40%.However,its fixed assets were used at only 40% 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 Fixed Assets/Sales ratio should the company set?

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.

Errors in the sales forecast can be offset by similar errors in costs and income forecasts.Thus,as long as the errors are not large,sales forecast accuracy is not critical to the firm.

If a firm wants to maintain its ratios at their existing levels,then if it has a positive sales growth rate of any amount,it will require some amount of external funding.

When we use the AFN equation to forecast the additional funds needed (AFN),we are implicitly assuming that all financial ratios are constant.If financial ratios are not constant,regression techniques can be used to improve the financial forecast.

Which of the following statements is CORRECT?

Last year Godinho Corp.had $420 million of sales,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?

Chua Chang & Wu Inc.is planning its operations for next year,and the CEO wants you to forecast the firm's additional funds needed (AFN) .Data for use in your forecast are shown below.Based on the AFN equation,what is the AFN for the coming year? $\begin{array}{llll}\text { Last year's sales }=\mathrm{S}_{0} & \$ 200,000 & \text { Last year's accounts payable } &\$ 50,000 \\\text { Sal es growth rate }=\mathrm{g} & 40 \% & \text { Last year's notes payable } & \$ 15,000 \\\text { Last year's total assets }=\mathrm{A}_{0} * & \$ 127,500 & \text { Last year's accruals } & \$ 20,000 \\\text { Last year's profit margin }=\mathrm{PM} & 20.0 \% & \text { Target payout ratio } & 25.0 \%\end{array}$ ?

Which of the following is NOT one of the steps taken in the financial planning process?

Which of the following statements is CORRECT?

Last year Emery Industries had $450 million of sales and $225 million of fixed assets,so its Fixed Assets/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?

Last year Handorf-Zhu Inc.had $850 million of sales,and it had $425 million of fixed assets that were used at only 85% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

Clayton Industries is planning its operations for next year.Ronnie Clayton,the CEO,wants you to forecast the firm's additional funds needed (AFN) .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. $\begin{array}{lrlr}\text { Last year's sales }=\mathrm{S}_{0} & \$ 350 & \text { Last yr's accounts payable } & \$ 40 \\\text { Sales growth rate }=\mathrm{g} & 30 \% & \text { Last yr's notes payable } & \$ 50 \\\text { Last year's total assets }=\mathrm{A}_{0}{ }^{*} & \$ 360 & \text { Last yr's accruals } & \$ 30 \\\text { Last year's prof margin }=\mathrm{PM} & 5 \% & \text { Target payout ratio } & 60 \%\end{array}$ ?

The capital intensity ratio is generally defined as follows:

Which of the following statements is CORRECT?