ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 12-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Capital intensity ratioKEY:Bloomâ€™s: Comprehension18.If a firm's capital intensity ratio (A0*/S0) decreasesas sales increase, use of the AFN formula is likelyto understatethe amount of additional funds required, other things held constant.ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 12-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Capital intensity ratioKEY:Bloomâ€™s: Comprehension19.The minimum growth rate that a firm can achieve with no access to external capital is called the firm'ssustainable growth rate. It can be calculated by using the AFN equation with AFN equal to zero andsolving for g.ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 12-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Sustainable growth rateKEY:Bloomâ€™s: Comprehension20.The fact that long-term debt and common stock are raised infrequently and in large amounts lessensthe need for the firm to forecast those accounts on a continual basis.ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 12-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Financial forecastingKEY:Bloomâ€™s: Comprehension21.The AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time.However, this assumption can be relaxed when we use the forecasted financial statement method.Three conditions where constant ratios cannot be assumed are economies of scale, lumpy assets, andexcess capacity.ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 12-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Forecasting when ratios chg.KEY:Bloomâ€™s: ComprehensionMULTIPLE CHOICE22.Which of the following assumptions is embodied in the AFN equation?a.Accounts payable and accruals are tied directly to sales.b.Common stock and long-term debt are tied directly to sales.c.Fixed assets, but not current assets, are tied directly to sales.d.Last year's total assets were not optimal for last year's sales.