fm14 2 - The capital intensity ratio is the reciprocal of...

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Answers and Solutions: 14 - 2 d. Additional funds needed (AFN) are those funds required from external sources to increase the firm’s assets to support a sales increase. A sales increase will normally require an increase in assets. However, some of this increase is usually offset by a spontaneous increase in liabilities as well as by earnings retained in the firm. Those funds that are required but not generated internally must be obtained from external sources. Although most firms’ forecasts of capital requirements are made by constructing pro forma income statements and balance sheets, the AFN formula is sometimes used to forecast financial requirements. It is written as follows: needed funds Additional = increase asset Required increase liability s Spontaneou earnings retained in Increase AFN = (A*/S 0 ) Δ S (L*/S 0 ) Δ S MS 1 (RR) Capital intensity is the dollar amount of assets required to produce a dollar of sales.
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Unformatted text preview: The capital intensity ratio is the reciprocal of the total assets turnover ratio. e. “Lumpy” assets are those assets that cannot be acquired smoothly, but require large, discrete additions. For example, an electric utility that is operating at full capacity cannot add a small amount of generating capacity, at least not economically. 14-2 Accounts payable, accrued wages, and accrued taxes increase spontaneously and proportionately with sales. Retained earnings increase, but not proportionately. 14-3 The equation gives good forecasts of financial requirements if the ratios A * /S and L * /S, as well as M and d, are stable. Otherwise, another forecasting technique should be used. 14-5 a. +. b. +. It reduces spontaneous funds; however, it may eventually increase retained earnings. c. +. d. +....
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