(Difficulty:
(Difficulty: E = Easy, M = Medium, and T = TE = Easy, M = Medium, and T = Tougough)h)
Multiple
Multiple Choice:
Choice: Conceptual
Conceptual
Easy:
Easy:
P Peerrcceennt t oof f ssaallees s mmeetthhoodd AAnnsswweerr: : e e DDiiffff: : EE 1 1.. TThhe e ppeerrcceennt t oof f ssaallees s mmeetthhood d iis s bbaasseed d oon n wwhhiicch h oof f tthhe e ffoolllloowwiinngg assumptions? assumptions? a.a. All balAll balance shance sheet acceet accounts arounts are tied dire tied directly tectly to saleso sales.. b.
b. Most baMost balance slance sheet acheet accountcounts are tied ds are tied directirectly to sally to sales.es. c.
c. ThThe e cucurrrrenent t lelevevel l of of tototatal l asassesets ts is is opoptitimamal l fofor r ththe e cucurrrrenent t sasaleless level.
level. d.
d. StateStatements ments a and a and c abovc above are e are correcorrect.ct. e.
e. StateStatements ments b and b and c abovc above are e are correcorrect.ct.
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: b : b DifDiff: f: EE 2
2.. A coA compmpanany is fy is fororececasastiting ang an inn incrcreaease ise in san saleles ans and is ud is usising tng the Ahe AF mF mododelel
to forecast
to forecast the additional the additional capital that capital that they need they need to raise. to raise. !hich of !hich of thethe fol
followlowing ing facfactortors s are are li"li"ely ely to to incincrearease se the the addadditiitionaonal l funfunds ds neeneededded #AF$?
#AF$? a.
a. The cThe companompany has a y has a lot of lot of e%cese%cess capas capacity.city. b.
b. The coThe company hmpany has a higas a high dividh dividend paend payout ryout ratio.atio. c.
c. The compThe company has a lot of sponany has a lot of spontaneotaneous liabius liabilitielities that incrs that increase as salease as saleses increase.
increase. d.
d. The cThe companompany has a y has a high phigh profit rofit margimargin.n. e.
e. All oAll of the sf the statemtatements aents above above are corre correct.rect.
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: e : e DifDiff: f: EE &
&.. 'e'efffferersoson (itn (ity (omy (ompuputeters hars has devs develelopoped a foed a forerecacaststining modg model to del to deteterermiminene
the additional
the additional funds it nefunds it needs in the eds in the upcoming year. upcoming year. All else beAll else being e)ual*ing e)ual* which of the following factors is li"ely to increase its additional funds which of the following factors is li"ely to increase its additional funds needed #AF$?
needed #AF$? a.
a. A sharp incA sharp increase in its forease in its forecasrecasted saleted sales and the compas and the company+s fi%ny+s fi%ed asseted assetss are at full capacity.
are at full capacity. b.
b. A redA reductiouction in itn in its divis dividend pdend payout ayout ratioratio.. c.
c. The compaThe company reducny reduces its reliaes its reliance on trade crednce on trade credit that sharit that sharply reducply reduceses its accounts payable.
its accounts payable. d.
d. StaStatemtementents a and b ars a and b are core correcrect.t. e.
e. StaStatemtementents a and c ars a and c are core correcrect.t.
CHAPTE !"
CHAPTE !"
#$%A%C$A& P&A%%$%' A%D #ECAT$%'
#$%A%C$A& P&A%%$%' A%D #ECAT$%'
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: c : c DifDiff: f: EE ,
,.. !h!hicich of thh of the foe follllowowining is lig is li"e"ely tly to ino incrcreaease tse the ahe addddititioionanal ful fundnds nes needededed
#AF$ in a given year? #AF$ in a given year? a.
a. The coThe company rmpany reduceeduces its dis its dividenvidend payod payout ratiut ratio.o. b.
b. The cThe companompany+s pry+s profit ofit margimargin incrn increaseeases.s. c.
c. The compThe company decany decideides s to reducto reduce e its relits relianiance on ce on accaccounounts payabts payable as le as aa form of financing.
form of financing. d.
d. The comThe company is oppany is operatierating well beng well below fullow full capacl capacity.ity. e.
e. All oAll of the sf the statemtatements aents above above are corre correct.rect.
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: a : a DifDiff: f: EE
-.
.
All else e)ual* which of the following is li"ely to increase a company+sAll else e)ual* which of the following is li"ely to increase a company+sadditional funds needed #AF$? additional funds needed #AF$? a.
a. An inAn increascrease in ite in its divis dividend pdend payout ayout ratioratio.. b.
b. The cThe companompany has a y has a lot of lot of e%cese%cess capas capacity.city. c.
c. AccouAccounts paynts payable iable increancrease fasse faster thater than salesn sales.. d.
d. All oAll of the sf the statemtatements aents above above are corre correct.rect. e.
e. one one of the of the statestatements ments above above is coris correct.rect.
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: b : b DifDiff: f: E E NN
.. AdAdddititioionanal fl funundds ns neeeededed ad arre be beest st ddefefinined ed aas/s/
a
a.. FFuunndds s tthhaat t aarre e oobbttaaiinneed d aauuttoommaattiiccaalllly y ffrroom m rroouuttiinne e bbuussiinneessss transactions.
transactions. b.
b. Funds thFunds that a firm must raiat a firm must raise e%terse e%ternally thnally through borough borrowirrowing or by sellinng or by sellingg new common or preferred stoc".
new common or preferred stoc". c.
c. The amoThe amount of assunt of assets re)uets re)uired per dired per dollar oollar of salesf sales.. d.
d. The amouThe amount of cash gent of cash generatnerated in a given yeaed in a given year minus the amr minus the amount of casount of cashh nee
needed ded to to finfinancance e the the addadditiitionaonal l capcapitaital l e%pe%pendendituitures res and and worwor"in"ingg capital needed to support the firm+s growth.
capital needed to support the firm+s growth. e.
e. A forecaA forecasting apsting approacproach in which the foreh in which the forecastecasted percentd percentage of sales foage of sales forr each item is held constant.
each item is held constant.
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: e : e DifDiff: f: E E NN 0
0.. !h!hicich of thh of the foe follllowowining is lig is li"e"ely tly to deo decrcreaease tse the ahe addddititioionanal ful fundnds nes needededed
#AF$ in a given year? #AF$ in a given year? a.
a. The coThe company impany increancreases its ses its retenretention rtion ratio.atio. b.
b. The cThe companompany+s pry+s profit ofit margimargin incrn increaseeases.s. c.
c. The cThe companompany+s say+s sales gles growth rowth is redis reduced.uced. d.
d. oth oth statestatements ments b and b and c are c are correcorrect.ct. e.
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: c : c DifDiff: f: EE ,
,.. !h!hicich of thh of the foe follllowowining is lig is li"e"ely tly to ino incrcreaease tse the ahe addddititioionanal ful fundnds nes needededed
#AF$ in a given year? #AF$ in a given year? a.
a. The coThe company rmpany reduceeduces its dis its dividenvidend payod payout ratiut ratio.o. b.
b. The cThe companompany+s pry+s profit ofit margimargin incrn increaseeases.s. c.
c. The compThe company decany decideides s to reducto reduce e its relits relianiance on ce on accaccounounts payabts payable as le as aa form of financing.
form of financing. d.
d. The comThe company is oppany is operatierating well beng well below fullow full capacl capacity.ity. e.
e. All oAll of the sf the statemtatements aents above above are corre correct.rect.
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: a : a DifDiff: f: EE
-.
.
All else e)ual* which of the following is li"ely to increase a company+sAll else e)ual* which of the following is li"ely to increase a company+sadditional funds needed #AF$? additional funds needed #AF$? a.
a. An inAn increascrease in ite in its divis dividend pdend payout ayout ratioratio.. b.
b. The cThe companompany has a y has a lot of lot of e%cese%cess capas capacity.city. c.
c. AccouAccounts paynts payable iable increancrease fasse faster thater than salesn sales.. d.
d. All oAll of the sf the statemtatements aents above above are corre correct.rect. e.
e. one one of the of the statestatements ments above above is coris correct.rect.
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: b : b DifDiff: f: E E NN
.. AdAdddititioionanal fl funundds ns neeeededed ad arre be beest st ddefefinined ed aas/s/
a
a.. FFuunndds s tthhaat t aarre e oobbttaaiinneed d aauuttoommaattiiccaalllly y ffrroom m rroouuttiinne e bbuussiinneessss transactions.
transactions. b.
b. Funds thFunds that a firm must raiat a firm must raise e%terse e%ternally thnally through borough borrowirrowing or by sellinng or by sellingg new common or preferred stoc".
new common or preferred stoc". c.
c. The amoThe amount of assunt of assets re)uets re)uired per dired per dollar oollar of salesf sales.. d.
d. The amouThe amount of cash gent of cash generatnerated in a given yeaed in a given year minus the amr minus the amount of casount of cashh nee
needed ded to to finfinancance e the the addadditiitionaonal l capcapitaital l e%pe%pendendituitures res and and worwor"in"ingg capital needed to support the firm+s growth.
capital needed to support the firm+s growth. e.
e. A forecaA forecasting apsting approacproach in which the foreh in which the forecastecasted percentd percentage of sales foage of sales forr each item is held constant.
each item is held constant.
Add
Additiitionaonal fl fundunds ns needeededed AnsAnswerwer: e : e DifDiff: f: E E NN 0
0.. !h!hicich of thh of the foe follllowowining is lig is li"e"ely tly to deo decrcreaease tse the ahe addddititioionanal ful fundnds nes needededed
#AF$ in a given year? #AF$ in a given year? a.
a. The coThe company impany increancreases its ses its retenretention rtion ratio.atio. b.
b. The cThe companompany+s pry+s profit ofit margimargin incrn increaseeases.s. c.
c. The cThe companompany+s say+s sales gles growth rowth is redis reduced.uced. d.
d. oth oth statestatements ments b and b and c are c are correcorrect.ct. e.
F
Foorreeccaassttiinng g ccoonncceeppttss AAnnsswweerr: : b b DDiiffff: : EE
.. !h!hicich oh of tf the he fofollllowowining g ststatatememenents ts is is momost st cocorrrrecect?t?
a.
a. 3n3ne e oof f ththe e "e"ey y ssteteps ps in in ththe e dedevvelelopopmement nt of of prpro o foforrma ma ffininanancicialal statements is to identify those assets and liabilities that increase statements is to identify those assets and liabilities that increase spontaneously with net income.
spontaneously with net income. b.
b. The firsThe first* and most crt* and most criticaitical* step in conl* step in construcstructing a set of pro foting a set of pro formarma financial statements is establishing the sales
financial statements is establishing the sales forecast.forecast.
c.
c. 4r4ro o foformrma a fifinanancnciaial l ststatatememenents ts as as didiscscusussesed d in in ththe e tete%t %t arare e ususeded primarily to assess a
primarily to assess a firm+s historical performance.firm+s historical performance. d.
d. The capiThe capital intetal intensity ransity ratio refltio reflects how raects how rapidly a firpidly a firm turns ovem turns over itsr its assets and is the reciprocal of the fi%ed assets turnover ratio.
assets and is the reciprocal of the fi%ed assets turnover ratio. e.
e. The percThe percent of sales metent of sales method produhod produces accuces accurate resrate results when fiults when fi%ed asset%ed assetss are lumpy and when economies of scale are present.
are lumpy and when economies of scale are present.
S
Sttrraatteeggiic c ppllaanns s aannd d ccoorrppoorraatte e ssccooppee AAnnsswweerr: : e e DDiiffff: : E E NN 5
5.. !h!hicich oh of tf the he fofollllowowining g ststatatememenents ts is is momost st cocorrrrecect?t?
a.
a. A missioA mission statemn statement is a condeent is a condensed vernsed version of a firmsion of a firm+s strat+s strategic plaegic plans.ns. b.
b. ooth th mimissssioion n ststatatememenents ts anand d ststraratetegigic c plplanans s ususuaualllly y bebegigin n wiwith th aa statement of the overall corporate
statement of the overall corporate purpose.purpose.
c.
c. A A fifirmrm+s +s cocorprpororatate e scscopope e dedefifinenes s a a fifirmrm+s +s lilinenes s of of bubusisineness ss anandd geographic area of operations.
geographic area of operations. d.
d. oth oth statestatements ments b and b and c are c are correcorrect.ct. e.
e. All oAll of the sf the statemtatements aents above above are corre correct.rect.
O
Oppeerraattiinng g ppllaanns s aannd d ccoorrppoorraatte e ssttrraatteeggiieess AAnnsswweerr: : c c DDiiffff: : E E NN 16
16.. !h!hicich oh of tf the he fofollllowowining sg statatetemementnts is is ms mosost ct cororrerectct??
a.
a. 3nc3nce e a a firfirm m has defihas defined its purpned its purposeose* * scoscope* and ob7epe* and ob7ectictivesves* * it mustit must develop a
develop a strategy fstrategy for achievor achieving its ing its goals. goals. (orporate (orporate strategies strategies areare detailed plans rather than broad
detailed plans rather than broad approaches.approaches.
b.
b. A A fifirmrm+s +s cocorprpororatate e pupurprposose e ststatates es ththe e gegeneneraral l phphililososopophy hy of of ththee business and provides managers with operational ob7ectives.
business and provides managers with operational ob7ectives. c.
c. 3pera3perating plans provting plans provide detailide detailed implemed implementatentation guidanion guidance* based on thece* based on the corporate s
corporate strategy* to trategy* to help meet help meet the corporathe corporate ob7ectiveste ob7ectives. . These planThese planss can be developed for any time hori8on* but most companies use a -9year can be developed for any time hori8on* but most companies use a -9year hori8on.
hori8on. d.
d. All oAll of the sf the statemtatements aents above above are corre correct.rect. e.
e. one one of the of the statestatements ments above above is coris correct.rect.
S
Sppoonnttaanneeoouusslly y ggeenneerraatteed d ffuunnddss AAnnsswweerr: : d Dd Diiffff: : E NE N 11
11.. SpSponontataneneououslsly gy genenereratated ed fufundnds as are re bebest st dedefifinened ad as/s/
a.
a. The amoThe amount of assunt of assets re)uets re)uired per dired per dollar oollar of salesf sales.. b.
b. A forecaA forecasting apsting approacproach in which the foreh in which the forecastecasted percentd percentage of sales foage of sales forr each item is held constant.
each item is held constant. c.
c. Funds thFunds that a firm must raiat a firm must raise e%terse e%ternally thnally through borough borrowirrowing or by sellinng or by sellingg new common or preferred stoc".
new common or preferred stoc". d
e. The amount of cash generated in a given year minus the amount of cash needed to finance the additional capital e%penditures and wor"ing capital needed to support the firm+s growth.
Capital intensity ratio Answer: d Diff: E N
12. The capital intensity ratio is/
a. The inverse of the total assets turnover ratio.
b. The percentage of liabilities that increase spontaneously as a percentage of sales.
c. The amount of assets re)uired per dollar of sales. d. oth statements a and c are correct.
e. one of the statements above is correct.
Medium:
Forecasting financial reuirements Answer: c Diff: ! 1&. !hich of the following statements is most correct?
a. The AF formula method assumes that the balance sheet ratios of assets
and liabilities to sales #A:;S6 and <:;S6$ remain constant over time*
while the percent of sales method does not.
b. !hen assets are added in large* discrete units as a company grows* then the assumption of constant ratios and steady growth rates is most appropriate.
c. Temporary e%cess capacity can be characteristic of a firm that adds lumpy assets as it grows or one that e%periences cyclical changes.
d. For a firm that has lumpy assets* small increases in sales can be accommodated without e%panding fi%ed assets* even when the firm is at capacity.
e. The graphical relationship between assets and sales where economies of scale are present is always linear.
Additional funds needed Answer: c Diff: !
1,. 3n the basis of historical relationships between its balance sheet items
and its sales* profit margin* and dividend policy* Thode (orporation+s analysts have graphed the relationship of additional funds needed #on the
=9a%is$ to possible growth rates in sales #on the >9a%is$. f Thode
decides to increase the percentage of earnings paid out as dividends* which of the following changes would occur in the graph?
a. The line would shift to the right.
b. The line would pass through the origin. c. The line would shift to the left.
d. The slope coefficient would fall. e. The slope coefficient would increase.
Additional funds needed Answer: c Diff: !
1-. (onsidering each action independently and holding other things constant*
which of the following actions would reduce a firm+s need for additional capital?
b. A decrease in the profit margin.
c. A decrease in the days sales outstanding. d. An increase in e%pected sales growth.
Additional funds needed Answer: d Diff: !
1. !hich of the following statements is most correct?
a. Since accounts payable and accrued liabilities must eventually be paid* as these accounts increase* AF also increases.
b. Suppose a firm is operating its fi%ed assets below 166 percent capacity but is at 166 percent with respect to current assets. f sales grow* the firm can offset the needed increase in current assets with its idle fi%ed assets capacity.
c. f a firm retains all of its earnings* then it will not need any additional funds to support sales growth.
d. Additional funds needed are typically raised from some combination of notes payable* long9term bonds* and common stoc". These accounts are nonspontaneous in that they re)uire an e%plicit financing decision to increase them.
e. one of the statements above is correct.
Percent of sales method Answer: d Diff: !
10. !hich of the following statements is most correct?
a. Any forecast of financial re)uirements involves determining how much money the firm will need and is obtained by adding together increases in assets and spontaneous liabilities and subtracting operating income. b. The percent of sales method of forecasting financial needs re)uires
only a forecast of the firm+s balance sheet. Although a forecasted
income statement helps clarify the need* it is not essential to the percent of sales method.
c. ecause dividends are paid after ta%es from retained earnings* dividends are not included in the percent of sales method of forecasting.
d. Financing feedbac"s describe the fact that interest must be paid on the debt used to help finance AF and dividends must be paid on the shares issued to raise the e)uity part of the AF. These payments would lower the net income and retained earnings shown in the pro7ected financial statements.
AFN formula method Answer: a Diff: !
1. !hich of the following statements is most correct?
a. nherent in the AF formula is the assumption that each asset item must increase in direct proportion to sales increases and that spontaneous liability accounts also grow at the same rate as sales.
b. f a firm has positive growth in its assets* but has no increase in retained earnings* AF for the firm must be positive.
c. @sing the AF formula* if a firm increases its dividend payout ratio in anticipation of higher earnings* but sales actually decrease* the firm will automatically e%perience an increase in additional funds needed. d. igher sales usually re)uire higher asset levels. Some of the increase
in assets can be supported by spontaneous increases in accounts payable and accrued liabilities* and by increases in certain current asset accounts and retained earnings.
e. Bividend policy does not affect re)uirements for e%ternal capital under the AF formula method.
Financial plan Answer: e Diff: ! N
15. !hich of the following is not one of the steps ta"en in the financial
planning process?
a. 4ro7ect financial statements and use these pro7ections to analy8e the effects of the operating plan on pro7ected profits and various financial ratios.
b. Betermine the funds needed to support the -9year plan.
c. Cstablish and maintain a system of controls to govern the allocation and use of funds within the firm.
d. Cstablish a performance9based management compensation system.
e. one of the above* i.e.* all the statements above are steps included in the financial planning process.
Multiple Choice: P*o+lems
Easy:
Additional funds needed Answer: d Diff: E
26. 'ill+s !igs nc. had the following balance sheet last year/
(ash D 66 Accounts payable D &-6
Accounts receivable ,-6 Accrued wages 1-6
nventories 5-6 otes payable 2*666
et fi%ed assets &,*666 Mortgage 2*-66
(ommon stoc" &*266
Eetained earnings ,*666
Total liabilities
Total assets D&*266 and e)uity D&*266
'ill has 7ust invented a non9slip wig for men that she e%pects will cause sales to double from D16*666 to D26*666* increasing net income to D1*666. She feels that she can handle the increase without adding any fi%ed assets. #1$ !ill 'ill need any outside capital if she pays no dividends? #2$ f so* how much?
a. o 8ero b. =es D0*066 c. =es D1*066 d. =es D066
e. o D066 surplus
Forecasting addition to retained earnings Answer: b Diff: E
21. Genney (orporation recently reported the following income statement for
2662 #numbers are in millions of dollars$/
Sales D0*666
3perating costs &*666
CT D,*666
nterest 266
Carnings before ta%es #CT$ D&*66
Ta%es #,6H$ 1*-26
et income available to
common shareholders D2*26
The company forecasts that its sales will increase by 16 percent in 266& and its operating costs will increase in proportion to sales. The company+s interest e%pense is e%pected to remain at D266 million* and the ta% rate will remain at ,6 percent. The company plans to pay out -6 percent of its net income as dividends* the other -6 percent will be additions to retained earnings. !hat is the forecasted addition to retained earnings for 266&?
a. D1*1,6 b. D1*26 c. D1*,,6
d. D1*056 e. D1*16
"inear regression and ratios Answer: e Diff: E N
22. Flannery Furnishings has D1-6*666 in sales. The company e%pects that its
sales will increase &6 percent this year. Flannery+s (F3 uses a simple linear regression to forecast the company+s inventory level for a given level of pro7ected sales. 3n the basis of recent history* the estimated relationship between inventories and sales #in thousands of dollars$ is
nventories I D0.-6 J 6.10-#Sales$.
Kiven the estimated sales forecast and the estimated relationship between inventories and sales* what is your forecast of the company+s year9end inventory turnover ratio?
a. 2.2-b. 2.5 c. &.&-d. &. e. ,.,&
Medium:
Additional funds needed Answer: c Diff: !
2&. rown L Sons recently reported sales of D166 million* and net income e)ual
to D- million. The company has D06 million in total assets. 3ver the
ne%t year* the company is forecasting a 26 percent increase in sales. Since the company is at full capacity* its assets must increase in proportion to sales. The company also estimates that if sales increase 26
percent* spontaneous liabilities will increase by D2 million. f the
company+s sales increase* its profit margin will remain at its current level. The company+s dividend payout ratio is ,6 percent. ased on the AF formula* how much additional capital must the company raise in order to support the 26 percent increase in sales?
a. D 2*666*666 b. D *666*666 c. D *,66*666 d. D 5*66*666 e. D1,*666*666
AFN with e#cess capacity Answer: b Diff: !
2,. A firm has the following balance sheet/
(ash D 26 Accounts payable D 26
Accounts receivable 26 otes payable ,6
nventories 26 <ong9term debt 6
Fi%ed assets 16 (ommon stoc" 6
Eetained earnings 26
Total liabilities
Total assets D2,6 and e)uity D2,6
Sales for the year 7ust ended were D,66* and fi%ed assets were used at 6 percent of capacity* but its current assets were at optimal levels. Sales are e%pected to grow by percent ne%t year* the profit margin is -percent* and the dividend payout ratio is 6 percent. ow much additional funds #AF$ will be needed?
a. D,.
b. 9D., #Surplus$ c. D2.,
d. 9D,. #Surplus$ e. D6.
AFN with e#cess capacity Answer: d Diff: !
2-. Splash ottling+s Becember &1st balance sheet is given below/
(ash D 16 Accounts payable D
1-Accounts receivable 2- otes payable 26
nventories ,6 Accrued wages and ta%es
1-et fi%ed assets 0- <ong9term debt &6
(ommon e)uity 06
Total liabilities
Total assets D1-6 and e)uity D1-6
Sales during the past year were D166* and they are e%pected to rise by -6
percent to D1-6 during ne%t year. Also* during last year fi%ed assets
were being utili8ed to only - percent of capacity* so Splash could have supported D166 of sales with fi%ed assets that were only - percent of last year+s actual fi%ed assets. Assume that Splash+s profit margin will remain constant at - percent and that the company will continue to pay out
6 percent of its earnings as dividends. To the nearest whole dollar*
what amount of nonspontaneous* additional funds #AF$ will be needed during the ne%t year?
a. D-0 b. D-1 c. D& d. D,6 e. D,
AFN with e#cess capacity Answer: d Diff: !
2. A firm has the following balance sheet/
(ash D 16 Accounts payable D 16
Accounts receivable 16 otes payable 26
nventories 16 <ong9term debt ,6
Fi%ed assets 56 (ommon stoc" ,6
Eetained earnings 16
Total liabilities
Total assets D126 and e)uity D126
Fi%ed assets are being used at 6 percent of capacity sales for the year 7ust ended were D266 sales will increase D16 per year for the ne%t , years the profit margin is - percent and the dividend payout ratio is 6 percent. Assume that underutili8ed fi%ed assets cannot be sold. !hat are the total e%ternal financing re)uirements for the entire , years* that is* the total AF for the ,9year period?
a. D ,.66 b. D 2.66
c. 9D 6.6 #surplus$ d. 9D1,.66 #surplus$
e. D 6
AFN with e#cess capacity Answer: a Diff: !
20. a%ter o% (ompany+s balance sheet showed the following amounts as of
Becember &1st/
(ash D 16 Accounts payable D
1-Accounts receivable ,6 Accrued liabilities
-nventories -6 otes payable 26
et fi%ed assets 166 <ong9term debt 26
(ommon stoc" 26
Eetained earnings 126
Total liabilities
Total assets D266 and e)uity D266
<ast year the firm+s sales were D2*666* and it had a profit margin of 16 percent and a dividend payout ratio of -6 percent. a%ter o% operated its fi%ed assets at 6 percent of capacity during the year. The company e%pects to increase ne%t year+s sales by &0.- percent* to D2*0-6* but the profit margin is e%pected to fall to & percent and the dividend payout ratio is e%pected to rise to 6 percent. !hat is a%ter o%+s additional funds needed #AF$ for ne%t year?
a. D 0.66
b. 9D &.66 #surplus$ c. D&6.-6
d. 9D50.-6 #surplus$ e. D1.-6
AFN formula and forecasted debt Answer: e Diff: !
2. 'ac"son (o. has the following balance sheet as of Becember &1* 2662.
(urrent assets D 66*666 Accounts payable D 166*666
Fi%ed assets ,66*666 Accrued liabilities 166*666
otes payable 166*666
<ong9term debt &66*666
Total common e)uity ,66*666
Total liabilities
Total assets D1*666*666 and e)uity D1*666*666
n 2662* the company reported sales of D- million* net income of D166*666* and dividends of D6*666. The company anticipates its sales will increase 26 percent in 266& and its dividend payout will remain at 6 percent. Assume the company is at full capacity* so its assets and spontaneous liabilities will increase proportionately with an increase in sales.
Assume the company uses the AF formula and all additional funds needed #AF$ will come from issuing new long9term debt. Kiven its forecast* how much long9term debt will the company have to issue in 266&?
a. D 12*666 b. D 6*666 c. D *666 d. D 52*666 e. D112*666
E#pected growth rate Answer: d Diff: !
25. Ape% Eoofing nc. has the following balance sheet #in millions of
dollars$/
(urrent assets D&.6 Accounts payable D1.2
et fi%ed assets ,.6 otes payable 6.
Accrued wages and ta%es 6.&
<ong9term debt 1.2
(ommon e)uity
1.-Eetained earnings 2.6
Total liabilities
Total assets D0.6 and e)uity D0.6
<ast year+s sales were D16 million* and Ape% estimates it will need to raise D2 million in new debt and e)uity ne%t year. =ou have identified the following facts/ #1$ it pays out &6 percent of earnings as dividends #2$ a profit margin of , percent is pro7ected #&$ fi%ed assets were used to full capacity and #,$ assets and spontaneous liabilities as shown on last year+s balance sheet are e%pected to grow proportionally with sales. f the above assumptions hold* what sales growth rate is the firm
anticipating? #int/ =ou can use the AF formula to help answer this
problem.$ a. 10H b. -1H c. 50H
d. ,,H e. 2H
E#pected growth rate Answer: e Diff: ! &6. =our company has the following balance sheet #in millions of dollars$/
(urrent assets D,.6 Accounts payable D6.
et fi%ed assets ,.6 otes payable 1.6
Accrued wages and ta%es 6.2
<ong9term debt
1.-(ommon e)uity
1.-Eetained earnings &.6
Total liabilities
Total assets D.6 and e)uity D.6
=ou have determined the following facts/ #1$ last year+s sales were D16 million #2$ the company will pay out ,6 percent of earnings as dividends #&$ a profit margin of & percent is pro7ected #,$ fi%ed assets were used to full capacity and #-$ all assets as well as spontaneous liabilities as shown on the balance sheet are e%pected to grow proportionally with sales. Further* your boss estimates she will need to raise D2 million e%ternally by issuing new debt or common stoc" ne%t year. f the above assumptions hold* what rate of sales growth is your boss e%pecting? #int/ =ou can use the AF formula to help answer this problem.$
a. 12.-6H b. 1-.2-H c. 1.66H d. 2&.1-H e. &1.5H
"e$el of assets Answer: d Diff: !
&1. @sing the AF formula approach* calculate the total assets of armon 4hoto
(ompany given the following information/ Sales this year I D&*666 sales increase pro7ected for ne%t year I 26 percent net income this year I D2-6 dividend payout ratio I ,6 percent pro7ected e%cess funds available ne%t year I D166 accounts payable I D66 notes payable I D166 and accrued wages and ta%es I D266. C%cept for the accounts noted* there were no other current liabilities. Assume that the firm+s profit margin remains constant and that the company is operating at full capacity.
a. D&*666 b. D2*266 c. D2*666 d. D1*266 e. D1*666
Forecasting and ratio changes Answer: a Diff: ! &2. Kemini everage has the following historical balance sheet/
(ash D 26 Accounts payable D 266
Accounts receivable 2,6 otes payable 1&6
nventories &26 Accrued liabilities &6
Total current assets D -6 Total current liabilities D &6
et plant L e)uipment ,26 <ong9term bonds 26
(ommon stoc" 206
Eetained earnings 116
Total liabilities
Total assets D1*666 and e)uity D1*666
3ver the ne%t year Kemini+s current assets* accounts payable* and accrued liabilities will grow in proportion to sales. <ast year+s sales were D66 and this year+s sales are e%pected to increase by ,6 percent. The firm will retain D- in earnings to fund current asset growth* and the rest of the increase will be funded entirely with notes payable. The net plant and e)uipment account will increase to D-66 and will be funded directly by
a new e)uity issue. !hat will Kemini+s new current ratio be after the
changes in the firm+s financial picture are complete? a. 1.-2
b. 1.1 c. 1.2 d. 1.21 e. 1.&0
Forecasting net income Answer: b Diff: ! N
&&. Samson+s Sailboats nc. recently reported the following income statement
#in millions of dollars$/
2662 Sales D&*-66 3perating costs 2*-66 CT D1*666 nterest 266 CT D 66 Ta%es #,6H$ &26 et income D ,6 Bividends #,6H$ D 152
Addition to retained earnings D 2
This year the company is forecasting a ,6 percent increase in sales* and it e%pects that its year9end operating costs will decline to 6 percent of sales. Samson+s ta% rate* interest e%pense* and dividend payout ratio are all e%pected to remain constant. !hat is Samson+s pro7ected 266& net income?
a. D 5&1 b. D1*6-
e. D1*1-6
"inear regression and recei$ables Answer: c Diff: ! N &,. 'ericho Cnterprises has D22- million in sales. The company e%pects that
its sales will increase percent this year. 'ericho+s (F3 uses a simple linear regression to forecast the company+s receivables level for a given level of pro7ected sales. 3n the basis of recent history* the estimated relationship between receivables and sales #in millions of dollars$ is
Eeceivables I D.- J 6.65-#Sales$.
Kiven the estimated sales forecast and the estimated relationship between receivables and sales* what is your forecast of the company+s year9end days+ sales outstanding #BS3$ ratio? Assume that BS3 is calculated on the basis of a &-9day year.
a. &.-6 b. ,&.66 c. ,0.,, d. -6.2-e.
-&.2-"inear regression and in$entories Answer: b Diff: ! N &-. arley rothers has D1-6 million in sales. The company e%pects that its
sales will increase 16 percent this year. arley+s (F3 uses a simple
linear regression to forecast the company+s inventory level for a given level of pro7ected sales. 3n the basis of recent history* the estimated relationship between inventories and sales #in millions of dollars$ is
nventories I D1- J 6.12#Sales$.
Kiven the estimated sales forecast and the estimated relationship between inventories and sales* what is your forecast of the company+s year9end inventory turnover ratio?
a. &. b. ,.0, c. -.2-d. -.-e. .&&
Forecasting in$entory with regression analysis Answer: c Diff: ! &. 3ver the past four years* a well9managed company has had the following
lin" between its inventories and its sales/
=ear Sales nventories
1555 D266 million D&- million
2666 2-6 million & million
2661 ,66 million -- million
2662 -66 million 06 million
The company is in the process of generating its forecasted financial statements for 266&. The company first generates a forecast for sales and then* given its sales forecast* uses a regression model #using data given above$ to forecast its inventories for 266&. Assuming that the forecasted sales for 266& are D-6 million* what are its forecasted inventories for 266&? a.
D-,*&55*-b. D0-*61*&,2 c. D*10-*2, d. D5&*666*666 e. D50*-,2*1&0
Forecasting in$entory with regression analysis Answer: b Diff: ! &0. A well9managed company has reported the following sales and inventories
over the past three years/
=ear Sales nventories
2666 D1*066*666 D1-6*666
2661 1*566*666 1-*666
2662 2*,66*666 1-*666
The company forecasts that its sales will be D&*666*666 in 266&* and the company uses regression analysis #on the basis of the last three years+
data$ to forecast its inventories. !hat are its forecasted inventories
#to the nearest dollar$ for 266&? a. D265*666
b. D21,*0,, c. D21-*5 d. D2&6*666 e. D-&6*0
Tough:
!a#imum growth rate Answer: b Diff: %
&. The Tapley (ompany is trying to determine an acceptable growth rate in
sales. !hile the firm wants to e%pand* it does not want to use any
e%ternal funds to support such e%pansion due to the particularly high interest rates in the mar"et now. aving gathered the following data for the firm* what is the ma%imum growth rate it can sustain without re)uiring additional funds?
• (apital intensity ratio I 1.2.
• 4rofit margin I 16H.
• Bividend payout ratio I -6H.
• (urrent sales I D166*666. • Spontaneous liabilities I D16*666. a. &.H b. ,.H c. -.2H d. .1H e. -.0H
AFN formula method Answer: b Diff: %
&5
.
olunteer Eetailers has the following balance sheet/(urrent assets D 66*666*666 Accounts payable D 266*666*666
Fi%ed assets 566*666*666 Accrued liabilities 266*666*666
<ong9term debt 66*666*666
(ommon stoc" 166*666*666
Eetained earnings ,66*666*666
Total liabilities
Total assets D1*-66*666*666 and e)uity D1*-66*666*666
olunteer+s profit margin is - percent* and it pays out ,6 percent of its
earnings as dividends. ts sales last year were D*666*666*666 its
assets were used to full capacity no economies of scale e%ist in the use of assets and its profit margin and payout ratio are e%pected to remain constant. Thus* both current assets and fi%ed assets are e%pected to grow at the same rate as sales. The company uses the AF formula to estimate funds re)uirements* and it plans to raise any re)uired e%ternal capital as short9term ban" loans* which will be included as part of current liabilities. f sales grow by &6 percent* what will olunteer+s current
ratio be after it has raised the necessary e%pansion funds? #ote/
gnore any financing feedbac" effects.$ a. 1.12
b. 1.20 c. 1.21 d. 1.-0 e. 1.1
AFN and current ratio Answer: e Diff: %
,6. Snowball L (ompany has the following balance sheet/
(urrent assets D 0*666 A;4 L accrued liabilities D 1*-66
Fi%ed assets &*666 S9T #&9month$ loans 2*666
(ommon stoc" 1*-66
Eetained earnings -*666
Total liabilities
Total assets D16*666 and e)uity D16*666
Snowball+s after9ta% profit margin is 11 percent* and the company pays out
6 percent of its earnings as dividends. ts sales last year were
D16*666 its assets were used to full capacity no economies of scale e%ist in the use of assets and the profit margin and payout ratio are e%pected to remain constant. The company uses the AF formula to estimate funds re)uirements* and it plans to raise any re)uired e%ternal capital as short9term ban" loans. f sales grow by -6 percent* what will Snowball+s current ratio be after it has raised the necessary e%pansion funds? #ote/ gnore any financing feedbac" effects.$
a. 2.& b. 2.66 c. 1.0 d. 1.-6 e. 1.&,
&egression analysis $s' percent of sales Answer: b Diff: %
,1. Mom+s (oo"ie (ompany has the following Becember &1* 2662 balance sheet/
nventories D166 A;4 L accrued liabilities D 6
3ther assets &66 3ther debt 106
(ommon e)uity 1-6
Total liabilities
Total assets D,66 and e)uity D,66
Sales for 2662 were D,66 the after9ta% profit margin was percent Mom+s paid out half of her earnings as dividends* and all assets e%cept inventories were operated at full capacity and will increase in proportion
to increases in sales. Bata on three companies that Mom+s uses for
benchmar" comparisons are shown below/
Sales nventories
(ompany A D&66 D 6
(ompany -66 6
(ompany ( 066 166
Mom+s forecasts a -6 percent increase in sales to D66. @sing the AF formula and assuming constant ratios* Mom+s accountant forecasted AF for 2662. f you forecasted her inventory re)uirements by the regression method rather than the percent of sales method* by how much would the AF change? Assume that the profit margin remains constant at percent* and e%cess inventories can be sold.
d. D&6 e. D6
Percent of sales method and &OE Answer: d Diff: %
,2. =ou have been given the attached information on the (rum (ompany. (rum
e%pects sales to grow by -6 percent in 266& and operating costs should increase in proportion to sales. Fi%ed assets were being operated at ,6 percent of capacity in 2662* but all other assets were used to full capacity. @nderutili8ed fi%ed assets cannot be sold. (urrent assets and spontaneous liabilities should increase in proportion to sales during 266&. The company plans to finance any e%ternal funds needed as &- percent notes payable and - percent common stoc". !hat is (rum+s pro7ected E3C
using the percent of sales method? #gnore any financing feedbac"
effects.$ a. 1.5H b. 2&.0&H c. 2-.H d. 15.55H e. 2&.2,H
The blan" wor"sheet for The (rum (ompany for the percent of sales method follows/
2662 266& Forecast 266& After AF
Sales D1*666.66 3perating costs 66.66 CT D 266.66 nterest 1.66 CT D 1,.66 Ta%es #,6H$ 0&.6 et income D 116.,6 Bividends #6H$ D .2, Add+n to E.C. D ,,.1 (urrent assets D 066.66
et fi%ed assets &66.66
Total assets D1*666.66 A;4 and accrued liabilities D 1-6.66 ;4 266.66 (ommon stoc" 1-6.66 Eetained earnings -66.66
Total liab L e)uity D1*666.66
AF 4rofit margin 11.6,H E3C 1.5 Bebt;Assets &-.66 (urrent ratio 2.66× 4ayout ratio 6.66H
1.6666
Multiple Part:
(The following information applies to the next three problems.)
nman ndustries has D2.- million in sales and D6. million in fi%ed assets. (urrently* the company+s fi%ed assets are operating at 0- percent of capacity.
Full capacity sales Answer: b Diff: E N
,&. !hat level of sales could nman ndustries have obtained if it had been
operating at full capacity? a. D2*66*666
b. D&*&&&*&&& c. D&*666*666 d. D&*12-*-0-e. D&*-66*666
%arget fi#ed assets(sales ratio Answer: d Diff: E N
,,. !hat is nman+s target fi%ed assets;sales ratio?
a. -.-H b. 16.6H c. 12.-H d. 2,.6H e. 26.H
E#cess capacity ad)ustment Answer: c Diff: ! N
,-. f nman+s sales increase -6 percent* how large of an increase in fi%ed
assets would the company need in order to meet its target fi%ed assets;sales ratio? a. D &&*2-6 b. D *0-6 c. D166*666 d. D12-*--6 e. D1-6*666
(The following information applies to the next three problems.)
Cllison ndustries has D& billion in sales and D6. billion in fi%ed assets. (urrently* the company+s fi%ed assets are operating at - percent of capacity.
Full capacity sales Answer: d Diff: E N
,. !hat level of sales could Cllison ndustries have obtained if it had been
operating at full capacity? a. D2*-66*666*666
b. D2*22*-&-*,0-c. D&*&&&*&&&*&&& d. D&*-25*,11*0-e. D&*6*525*0
%arget fi#ed assets(sales ratio Answer: b Diff: E N
,0. !hat is Cllison+s target fi%ed assets;sales ratio?
a. 1-.&&H b. 22.0H c. 2.5,H d. &6.66H e. &&.&&H
Fi#ed assets and e#cess capacity Answer: c Diff: E N
,. f Cllison+s sales increase 26 percent* how large of an increase in fi%ed
assets would the company need in order to meet its target fi%ed assets;sales ratio? a. D 0*0-6*666 b. D12*-66*666 c. D1*666*666 d. D26*666*666 e. D22*2-6*666
(The following information applies to the next two problems.)
Kourmet Gitchens ncorporated recently reported the following 2662 income statement #in millions of dollars$/
Sales D1*22-3perating costs 0-CT D &-6 nterest 06 CT D 26 Ta%es #,6H$ 112 et income D 1 Bividends #&&.&&&H$ D -
Addition to retained earnings D 112
The company is forecasting a &6 percent increase in 266& sales* and it e%pects that its year9end operating costs will e)ual 0- percent of sales. Kourmet+s ta% rate* interest e%pense* and dividend payout ratio are all e%pected to remain constant.
Pro forma net income Answer: e Diff: ! N
,5. !hat is Kourmet+s pro7ected 266& net income #in millions of dollars$?
a. D12-.22 b. D1&-.0-c. D1,&.,, d. D10-. e. D15.
Pro forma di$idend growth rate Answer: c Diff: E N
-6. !hat is the e%pected growth rate in Kourmet+s dividends?
a. -.66H b. 12.-6H c. 10.26H d. 26.&&H e. 22.0-H
e+ Appendi- !".
Multiple Choice: Conceptual
Easy:
Percent of sales method Answer: d Diff: E
109-1. The percent of sales method produces accurate results unless which of
the following conditions is #are$ present? a. Fi%ed assets are Nlumpy.O
b. Strong economies of scale are present.
c. C%cess capacity e%ists because of a temporary recession.
d. Statements a* b* and c all ma"e the percent of sales method inaccurate.
e. Statements a and c ma"e the percent of sales method inaccurate* but* as the te%t e%plains* the assumption of increasing economies of scale is built into the percent of sales method.
Forecasting when ratios sub)ect to change Answer: e Diff: E N
109-2. !hich of the following conditions does not ma"e the assumption that each
spontaneous asset and liability item increases at the same rate as sales?
a. Cconomies of scale. b. <umpy assets.
c. C%cess assets due to forecasting errors. d. Statements a and b are correct.
Medium:
Changing balance sheet ratios Answer: d Diff: !
109-&. !hich of the following statements is most correct?
a. f the capital intensity ratio is high* this permits sales to grow more rapidly without much outside capital.
b. The lower the profit margin* the lower the additional funds needed because less assets are needed to support e%isting sales.
c. !hen positive economies of scale are present* linear balance sheet relationships no longer hold. As sales increase* a proportionately greater stoc" of assets is re)uired to support the higher sales level.
d. Technological considerations often re)uire firms to add fi%ed assets
in large* discrete units. Such assets are called lumpy assets and
they affect the firm+s financial re)uirements through the fi%ed assets;sales ratio at different sales levels.
e. The percent of sales method accounts for changing balance sheet ratios and thus* cyclical changes in the actual sales to assets ratio do not have an impact on financing re)uirements.
CHAPTE !"
A%E A%D &/T$%
1
'
Percent
of
sales
method
Answer:
e Diff:
E
2
'
Additional
funds
needed
Answer:
b Diff:
E
3nly answer b will increase AF the other statements will decrease AF. &
'
Additional
funds
needed
Answer:
e Diff:
E
AF I #A:;S$∆S 9 #<:;S$∆S 9 #M$#S1$#EE$. Statement a is correct. f the company e%pects a sharp increase in sales* then current assets must increase. owever* if in addition to that* fi%ed assets are at full capacity* the company+s fi%ed assets will also have to increase. #t may need to build a new factory.$ Therefore* the first term in the AF formula will increase* so AF will increase. Statement b is false. f the firm+s dividend payout ratio decreases* #EE$ will increase. This will increase the value of the third term in the AF formula. Since the third term gets larger* AF will decrease. Statement c is correct. f the company reduces its trade credit* it is reducing its accounts payable. f accounts payable decreases #although* usually we assume it is a spontaneous liability$* spontaneous liabilities* <:* will be smaller. f <: is smaller* the entire second term is smaller therefore* AF will increase.
,
'
Additional
funds
needed
Answer:
c Diff:
E
Eemember the AF formula is stated as/ AF I #A:;S$∆S 9 #<:;S$∆S 9 #M$#S1$ #EE$. f the firm+s dividend payout decreases* EE will increase and AF will decrease* not increase. Therefore* statement a is false. f M increases* AF will decrease. Therefore* statement b is false. f the company reduces its reliance on accounts payable* then spontaneous liabilities will decrease. Thus* AF will increase. Therefore* statement c is correct. f the company is operating well below full capacity* then it will not need new fi%ed assets. Therefore* spontaneous assets will be smaller and AF will decrease. Therefore* statement d is false.
-
'
Additional
funds
needed
Answer:
a Diff:
E
AF I 6
S
:
A
#∆S$ 9 6S
:
<
#∆S$ P MS1#EE$. f EE decreases* this will ma"e the
entire third term of the formula smaller* which will ma"e AF larger. EE is #1 9 d$* so an increase in d ma"es EE smaller. Therefore* an increase in d increases AF. So* statement a is true. f the company has e%cess capacity* then it doesn+t need to increase fi%ed assets. f it only has to increase current assets and not fi%ed assets* AF will be smaller. #That is* A: is smaller.$ Therefore* statement b is false. Statement c is false. f accounts payable increase faster than sales* then <:;S 6 will increase by more than the sales increase. As this term increases* AF will decrease.
'
Additional
funds
needed
Answer:
b Diff:
E N
The correct answer is statement b. Statement a is the definition of spontaneously generated funds. Statement c is the definition of the capital intensity ratio. Statement d is the definition of free cash flow. Statement e is the definition of the constant ratio method of forecasting.
5
0
Strategic plans and corporate scope
Answer: e Diff: E N
The correct answer is statement e. Statements a* b* and c are all verbatim statements from the te%t.
16
'
Operating plans and corporate strategies
Answer: c Diff: E N
The correct answer is statement c. Statement a is incorrect corporate strategies are broad approaches rather than detailed plans. Statement b is incorrect the firm+s corporate purpose does not provide managers with operational ob7ectives. Statement c is correct. Therefore* the correct choice is statement c.
11
'
Spontaneously generated funds
Answer: d Diff: E N
The correct answer is statement d. Statement a is the definition of the capital intensity ratio. Statement b is the definition of the constant ratio method of forecasting. Statement c is the definition of additional funds needed. Statement e is the definition of free cash flow.
12
'
Capital
intensity
ratio
Answer:
d Diff:
E N
The correct answer is statement d. The capital intensity ratio is Total assets;Sales* which is the inverse of the total assets turnover ratio. So* statement a is correct. Statement b is the definition of <iabilities;Sales* so this is not correct. Statement c is the correct definition of the capital intensity ratio. Therefore* the correct choice is statement d.
1&
'
Forecasting financial reuirements
Answer: c Diff: !
1,
'
Additional
funds
needed
Answer:
c Diff:
!
1-
'
Additional
funds
needed
Answer:
c Diff:
!
1
'
Additional
funds
needed
Answer:
d Diff:
!
10
'
Percent
of
sales
method
Answer:
d Diff:
!
1
'
AFN
formula
method
Answer:
a Diff:
!
15
'
Financial
plan
Answer: e Diff: ! N
The correct answer is statement e. Statements a* b* c* and d are all steps ta"en in the financial planning process. Two additional steps not mentioned are/ Forecast funds availability over the ne%t five years and develop procedures for ad7usting the basic plan if the economic forecasts upon which the plan was based do not materiali8e.
26
'
Additional
funds
needed
Answer:
d Diff:
E
alance sheet solution/
(ash D 1*66 Accounts payable D 066
Accounts receivable 566 Accrued wages &66
nventories 1*566 otes payable 2*666
et fi%ed assets &,*666 Mortgage 2*-66
(ommon stoc" &*266 Eetained earnings -*666 Total liabilities
AF I D&*,66 9 D&0*066 I D066. Formula solution/ S6 I ∆S MS1 I D1*666. AF I 6
S
:
A
#∆S$ 9 6S
:
<
#∆S$ 9 MS1#EE$ I D2*266 9 D-66 9 D1*666#1$ I D066.21
'
Forecasting addition to retained earnings
Answer: b Diff: E
2662 Forecast asis 266&
Sales D0*666 × 1.1 D0*066
3perating costs &*666 × 6.,2 #S1$ &*&66
CT D,*666 D,*,66
nterest 266 266
Carnings before ta%es #CT$ D&*66 D,*266
Ta%es #,6H$ 1*-26 1*6
et income available to
common shareholders D2*26 D2*-26
Bividends to common #-6H$ D1*26
Addition to retained earnings #-6H$ D1*26
22
'
"inear regression and ratios
Answer: e Diff: E N
Sales I D1-6*666 gSales I &6H nv. I D0.-6 J 6.10-#Sales$. S1 I D1-6*666 × 1.&6 I D15-*666.
nv. I D0.-6 J 6.10-#D15-$ I ,,.62-.
Since this relationship is e%pressed in thousands of dollars* nv. I D,,.62- × D1*666 I D,,*62.-6.
Sales;nv. I D15-*666;D,,*62.-6 I ,.,2-- ≈ ,.,&. 2&
'
Additional
funds
needed
Answer:
c Diff:
!
AF I
earnings
retained
in
?ncrease
9
increase
liability
s
Spontaneou
9
increase
asset
Ee)uired
S6 I D,66 S1 I S6 × 1.6- I D,26 S(apacity I D,66;6.6 I D-66. o new fi%ed assets are needed to support the sales increase.
alance sheet solution/
(ash D 21 Accounts payable D 21.6
Accounts receivable 21 otes payable ,6.6
nventories 21 <ong9term debt 6.6
Fi%ed assets 16 (ommon stoc" 6.6
Eetained earnings 2., Total liabilities
Total assets D2,& and e)uity D2,5.,
Addition to retained earnings I D,26 × 6.6- × 6., I D.,6. AF I D2,&.6 9 D2,5., I 9D.,. Surplus of .,.
Formula solution/ AF I D,66 D6 #D26$ 9 D,66 D26 #D26$ 9 D,26#6.6-$#6.,6$ I D&.6 9 D1.6 9 D., I 9D.,.
Fi%ed assets are not included in the formula e)uation since full capacity sales #D-66$ have not been reached.
2-'
AFN
with
e#cess
capacity
Answer:
d Diff:
!
S6 I D166 S1 I D1-6 S(apacity I
6.-D166 I D110.-.
ratio
sales
to
assets
fi%ed
Target
I (apacity Sales assets Fi%ed I D110.- D0- I 6.&0-.S1 × Target ratio I ew fi%ed assets level. D1-6 × 6.&0- I D5-.2. alance sheet solution/
(ash D 1-.66 Accounts payable D 22.-6
Accounts receivable &0.-6 otes payable 26.66 nventories 6.66 Accrued wages and ta%es 22.-6 et fi%ed assets 5-.2 <ong9term debt &6.66 (ommon e)uity 0&.66 Total liabilities
Total assets D26.12 and e)uity D1.66
Addition to retained earnings I D1-6 × 6.6- × 6.,6 I D&.66. AF I D26.12 9 D1.66 I D,6.12 ≈ D,6.
2
'
AFN
with
e#cess
capacity
Answer:
d Diff:
!
S6 I D266 S1 I D216 S2 I D226 S& I D2&6 S, I D2,6. S(apacity I
6.6 D266
I D2-6. Fi%ed assets will not need to be increased since S , Q S(apacity D2,6 Q D2-6.
(ash D 12 Accounts payable D 12
Accounts receivable 12 otes payable 26
nventories 12 <ong9term debt ,6
Fi%ed assets 56 (ommon stoc" ,6
Eetained earnings 2 Total liabilities
Total assets D12 and e)uity D1,6
Addition to retained earnings/ #S1 J S2 J S& J S,$ × 6.6- × 6.,6 I D1.66. AF I D12 9 D1,6 I 9D1, Surplus. Formula solution/ AF I D266 D&6 #D,6$ 9 D266 D16 #D,6$ 9 #6.6-$#D566$#6.,$ I 9D1, #Surplus$.
The D566 is the sum of sales over the ,9year period. Fi%ed assets are not included in the formula e)uation since full capacity sales #D2-6$ are never reached.
20
'
AFN
with
e#cess
capacity
Answer:
a Diff:
!
S6 I D2*666 S1 I D2*0-6 S(apacity I D2*666;6.6 I D2*-66. Target fi%ed assets to sales ratio I
(apacity Sales assets Fi%ed I D2*-66 D166 I 6.6,. ew fi%ed assets level I 6.6, × D2*0-6 I D116.
alance sheet solution/
(ash D 1&.0- Accounts payable D
26.2-Accounts receivable --.66 Accrued liabilities
.0-nventories .0- otes payable 26.666
et fi%ed assets 116.66 <ong9term debt 26.666 (ommon stoc" 26.666 Eetained earnings 1-&.666 Total liabilities
Total assets D2,0.-6 and e)uity D2,6.-66
Addition to retained earnings I D2*0-6 × 6.6& × 6.,6 I D&&.66. AF I D2,0.-6 9 D2,6.-6 I D0.66.
2
'
AFN formula
and forecasted debt
Answer: e Diff: !
AF I #A:;S$∆S 9 #<:;S$∆S 9 #M$#S1$#EE$. A: I D1*666*666 because the firm is at full capacity. #The firm will need to increase fi%ed assets as well as current assets.$
Sales I D-*666*666. ∆S I D-*666*666 × 26H
I D1*666*666.
<: I D166*666 J D166*666 I D266*666. 3nly the accounts payable and accrued liabilities are spontaneous liabilities. #otes payable are not.$
I 2H.
S1 I D-*666*666 × 1.2 I D*666*666.
AF I #A:;S$∆S 9 #<:;S$∆S 9 #M$#S1$ #EE$
I #D1*666*666;D-*666*666$#D1*666*666$ 9 #D266*666;D-*666*666$ #D1*666*666$ 9 #6.62$#D*666*666$ #6.,$
I D266*666 9 D,6*666 9 D,*666 I D112*666.
25
'
E#pected
growth
rate
Answer:
d Diff:
!
<et S1 I S6#1 J g$. <et ∆S;S6 I g or growth rate. EE I #1 9 d$ I #1 9 6.&$ I 6.0. Find g I ? D2 I #A:;S6$∆S 9 #<:;S6$∆S 9 MS1#EE$ D2 I A:#g$ 9 <:#g$ 9 MS6#1 J g$#EE$ D2 I D0g 9 D1.-g 9 6.6,#D16$#1 J g$#6.06$ D2 I D-.-g 9D6.2g 9 D6.2 D-.22g I D2.2 g I 6.,&0 ≈ ,,H. &6
'
E#pected
growth
rate
Answer:
e Diff:
!
AF I #A:;S6$∆S 9 #<:;S6$∆S 9 MS1#EE$.
∆S;S6 I g S1 I S6#1 J g$ EE I #1 9 d$ I #1 9 6.,$ I 6.. Find g I ?
AF I A:#g$ 9 <:#g$ 9 M#S6$#1 J g$#EE$ D2 I Dg 9 D1g 9 6.6&#D16$#1 J g$#6.$ D2 I Dg 9 D1g 9 D6.1#1 J g$ D2 I D0g 9 D6.1 9 D6.1g D2.1 I D.2g D2.1;D.2 I g g I &1.5H. &1
'
"e$el
of
assets
Answer:
d
Diff:
!
AF I 6
S
:
A
#∆S$ 9 6S
:
<
#∆S$ 9 MS1#EE$ 9D166 I D&*666 A: #D66$ 9 D&*666 D66 #D66$ 9 D&*666 D2-6 #D&*66$#6.$ 9D166 I 6.26A: 9 D16 9 D16 6.26A: I D2,6 A: I D1*266.'
Forecasting
and
ratio
changes
Answer:
a Diff:
!
Frcst 1st Frcst 1st
Actual asis 4ass Actual asis 4ass
(ash D 26 6.62- D 2 Acc pay D 266 6.2- D 26 Accts rec 2,6 6.&66 && otes pay 1&6 J2 212 nventories &26 6.,66 ,, Accrued liab &6 6.6&0- ,2 Total (.A. D -6 D 12 Tot. curr liab D &6 D -&,
et plant ,26 J6 -66 <T bonds 26 26
(ommon st" 206 J6 &-6
EC 116 J- 1
Total assets D1*666 D1*&12 Total <LC D1*666 D1*&12
The old current ratio I D-6;D&6 I 1.1×.
(alculate new current assets* new <T debt* and e)uity/ ew current assets I D2 J D&& J D,, I D12.
ew <T debt and e)uity I D26 J D&-6 J D1 I D00.
(alculate new current liabilities and new current ratio/
ew current liabilities I ew total assets 9 <T debt and e)uity I D1*&12 9 D00 I D-&,.
The new current ratio I D12;D-&, I 1.-2×. &&
'
Forecasting
net
income
Answer:
b Diff:
! N
2662 Forecast asis 266&
Sales D&*-66 × 1.,6 D,*566 3perating costs 2*-66 × 6.6 #S1$ 2*5,6 CT D1*666 D1*56 nterest 266 266 CT D 66 D1*06 Ta%es #,6H$ &26 06, et income D ,6 D1*6- Bividends #,6H$ D 152 D,22.,6
Addition to retained earnings D 2 D&&.6 &,
'
"inear regression and recei$ables
Answer: c Diff: ! N
Sales I D22-*666*666 gSales I H Eec. I D.- J 6.65-#Sales$. S1 I D22-*666*666 × 1.6 I D2,&*666*666.
&-
'
"inear regression and in$entories
Answer: b Diff: ! N
Sales I D1-6*666*666 gSales I 16H nv. I D1- J 6.12#Sales$. S1 I D1-6*666*666 × 1.16 I D1-*666*666.
nv. I D1- J 6.12#D1-$ I D&,. million.
Sales;nv. I D1-*666*666;D&,*66*666 I ,.0,.
&
'
Forecasting in$entory with regression analysis
Answer: c Diff: !
Step 1/ Betermine the regression e)uation using the calculator/ Cnter the input data in the calculator/
266 4@T &- ΣJ 2-6 4@T & ΣJ ,66 4@T -- ΣJ -66 4@T 06 ΣJ
6 yR *m displays the y9intercept* D5.56116.
Swap displays the slope of the line* 6.110&&. nventories I D5.5611 J 6.110&&#Sales$.
Step 2/ 4redict inventories/
-6 yR *m displays the predicted level of inventories* D.10-2, million* or D*10-*2,.
&0
'
Forecasting in$entory with regression analysis
Answer: b Diff: !
Step 1/ Betermine the regression e)uation using the calculator/ Cnter the input data in the calculator/
1*066*666 4@T 1-6*666 ΣJ 1*566*666 4@T 1-*666 ΣJ 2*,66*666 4@T 1-*666 ΣJ
6 yR *m displays the y9intercept* D06*-12.2.
Swap displays the slope of the line* 6.6,6. nventories I D06*-12.2 J 6.6,6#Sales$.
Step 2/ 4redict inventories/
&*666*666 yR *m displays the predicted level of inventories*
D21,*0,&.-5 ≈ D21,*0,,.
&
