FIN 534 Quiz 7 week 8 Rating A A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase? Answer The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. The company increases its dividend payout ratio. The company begins to pay employees monthly rather than weekly. The company’s profit margin increases. The company decides to stop taking discounts on purchased materials. Which of the following statements is CORRECT? Answer Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm’s goals. A firm’s corporate purpose states the general philosophy of the business and provides managers with specific operational objectives. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon. A firm’s mission statement defines its lines of business and geographic area of operations. The corporate scope is a condensed version of the entire set of strategic plans. Last year Wei Guan Inc. had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity. In millions, by how much could Wei Guan’s sales increase before it is required to increase its fixed assets? Answer $170.09 $179.04 $188.46 $197.88 $207.78 Last year Godinho Corp. had $250 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? Answer $312.5 $328.1 $344.5 $361.8 $379.8 The term “additional funds needed (AFN)” is generally defined as follows: Answer Funds that are obtained automatically from routine business transactions. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations. The amount of assets required per dollar of sales. The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant. Spontaneous funds are generally defined as follows: Answer Assets required per dollar of sales. A forecasting approach in which the forecasted percentage of sales for each item is held constant. Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock. Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes. The amount of cash raised 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. Which of the following statements is CORRECT? Answer 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. 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. Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does …
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