e. Statements a and c are correct. f. (9.3) Additional funds needed Answer: b Diff: E 19 . A company is forecasting an increase in sales and is using the AFN model to forecast the additional capital that they need to raise. Which of the following factors are likely to increase the additional funds needed (AFN)? a. The company has a lot of excess capacity. b. The company has a high dividend payout ratio. c. The company has a lot of spontaneous liabilities that increase as sales increase. d. The company has a high profit margin. e. All of the answers above are correct. (9.4) Percentage of sales method Answer: e Diff: E 20 . The percentage of sales method is based on which of the following assumptions? a. All balance sheet accounts are tied directly to sales. b. Most balance sheet accounts are tied directly to sales. c. The current level of total assets is optimal for the current sales level. d. Answers a and c above. e. Answers b and c above. Page 4 Chapter 9: Financial Planning and Forecasting Financial Statements
(9.4) Percentage of sales method Answer: d Diff: E 21 . The percentage of sales method produces accurate results unless which of the following conditions is (are) present? a. Fixed assets are "lumpy." b. Strong economies of scale are present. c. Excess capacity exists because of a temporary recession. d. Answers a, b, and c all make the percentage of sales method inaccurate. e. Answers a and c make the percentage of sales method inaccurate, but, as the text explains, the assumption of increasing economies of scale is built into the percentage of sales method. (9.4) Forecasting concepts Answer: b Diff: E 22 . Which of the following statements is most correct? a. One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income. b. The first, and most critical, step in constructing a set of pro forma financial statements is establishing the sales forecast. c. Pro forma financial statements as discussed in the text are used primarily to assess a firm's historical performance. d. The capital intensity ratio reflects how rapidly a firm turns over its assets and is the reciprocal of the fixed assets turnover ratio. e. The percentage of sales method produces accurate results when fixed assets are lumpy and when economies of scale are present. Medium: (9.3) Forecasting financial requirements Answer: c Diff: M 23 . Which of the following statements is most correct? a. The AFN formula method assumes that the balance sheet ratios of assets and liabilities to sales (A*/S 0 and L*/S 0 ) remain constant over time, while the percentage of sales method does not. b. When assets are added in large, discrete units as a company grows, then the assumption of constant ratios and steady growth rates is most appropriate.
You've reached the end of your free preview.
Want to read all 26 pages?