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Chapter14FinancialPlanningForecastingSolutions - Financial...

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Financial Planning and Forecasting - Solutions 1. The capital intensity ratio can be defined as the level of assets needed to support a given level of sales, and we might expect to observe differences in this ratio between different industries. * A. True B. False 2. Holding all other factors constant, such as interest expense and dividends, an increase in the cost of goods sold should increase a firm’s need for additional capital. * A. True B. False 3. 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. A. True * B. False 4. The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin. A. True * B. False 5. Additional funds needed are typically raised from some combination of notes payable, accounts payable, accruals, long-term bonds, and common stock. We can consider these accounts to be non-spontaneous, since they require an explicit financing decision by the form to increase them. A. True * B. False 6. The net present value (NPV) method assumes that intervening cash flows will be reinvested at the risk-free rate, while the internal rate of return (IRR) method assumes that intervening cash flows will be reinvested at the firm’s cost of capital. * Old Exam Questions - Financial Planning and Forecasting - Solutions Page 1 of 56 Pages
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7. An increase in the firm's inventory balance will normally require additional financing unless the increase is matched by an equally large decrease in some other asset account. * 8. To determine the amount of additional funds needed, you may subtract the expected increase in liabilities (a source of funds) from the sum of the expected increases in retained earnings and assets (both uses of funds). A. True * B. False 1. Which of the following statements concerning percent of sales forecasting is most correct. A. Simply due to its mathematical basis, the equation model for percent of sales forecasting will produce a more accurate forecast than a spreadsheet model. B. As long as the firm is currently operating at full capacity, fixed assets should be set as a constant percent of sales, even if they may be somewhat lumpy in reality. C. Although the firm may exhibit economies of scale, the percentages that we observe for individual assets (such as cash, inventory, fixed assets, etc.) will not vary over time as the sales of the firm change. D. A disadvantage of the spreadsheet model is that it is not easy to include changes in a firm’s profit margin, changes in its dividend policy, planned acquisitions of assets, or repayments of liabilities.
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