grow at the same rate as sales, then the percent of sales method will provide more accurate forecasts than the projected financial statement method. Chapter 17: Financial Planning and Forecasting Page 175
AFN formula methodAnswer: a MEDIUM/HARD 23.Which of the following statements is CORRECT? PART II – Questions and Problems from Prior Test Bank not used in Part I Multiple Choice: Problems MEDIUM (#24 through #27) Linear regression and ratios 24.Flannery Furnishings has $150,000 in sales. The company expects that itssales will increase 30% this year. Flannery’s CFO uses a simple linearregression to forecast the company’s inventory level for a given level ofprojected sales. On the basis of recent history, the estimatedrelationship between inventories and sales (in thousands of dollars) isInventories = $7.50 + 0.1875(Sales).Given the estimated sales forecast and the estimated relationship betweeninventories and sales, what is your forecast of the company’s year-endinventory turnover ratio? Page 176 Chapter 17: Financial Planning and Forecasting
25.Brown & Sons recently reported sales of $100 million, and net income equalto $5 million. The company has $70 million in total assets. Over thenext year, the company is forecasting a 20% increase in sales. Since thecompany is at full capacity, its assets must increase in proportion tosales. The company also estimates that if sales increase 20%, spontaneousliabilities will increase by $2 million. If the company’s sales increase,its profit margin will remain at its current level. The company’sdividend payout ratio is 40%. Based on the AFN formula, how muchadditional capital must the company raise in order to support the 20%increase in sales? a.$ 2,000,000b.$ 6,000,000c.$ 8,400,000d.$ 9,600,000e. $14,000,000Level of assetsAnswer: d
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