Grow at the same rate as sales then the percent of

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 method Answer: 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 its
sales will increase 30% this year. Flannery’s CFO uses a simple linear
regression to forecast the company’s inventory level for a given level of
projected sales. On the basis of recent history, the estimated
relationship between inventories and sales (in thousands of dollars) is
Inventories = $7.50 + 0.1875(Sales).
Given the estimated sales forecast and the estimated relationship between
inventories and sales, what is your forecast of the company’s year-end
inventory turnover ratio?
Page 176 Chapter 17: Financial Planning and Forecasting

25
. Brown & Sons recently reported sales of $100 million, and net income equal
to $5 million. The company has $70 million in total assets. Over the
next year, the company is forecasting a 20% increase in sales. Since the
company is at full capacity, its assets must increase in proportion to
sales. The company also estimates that if sales increase 20%, spontaneous
liabilities will increase by $2 million. If the company’s sales increase,
its profit margin will remain at its current level. The company’s
dividend payout ratio is 40%. Based on the AFN formula, how much
additional capital must the company raise in order to support the 20%
increase in sales?
a. $ 2,000,000
b. $ 6,000,000
c. $ 8,400,000
d. $ 9,600,000
e. $14,000,000
Level of assets Answer: d