If a firm wants to maintain its ratios at their existing levels, then if it has
ID: 2686497 • Letter: I
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If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it will require some amount of external funding. True False To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds. True False Which of the following is NOT one of the steps taken in the financial planning process? A. Assumptions are made about future levels of sales, costs, and interest rates for use in the forecast. B. The entire financial plan is reexamined, assumptions are reviewed, and the management team considers how additional changes in operations might improve results. C. Projected ratios are calculated and analyzed. D. Develop a set of projected financial statements. E. Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors. Which of the following statements is CORRECT? A. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A*0/S0 and L*0/S0) vary from year to year in a stable, predictable manner. B. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow. C. Firms whose fixed assets areExplanation / Answer
If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it will require some amount of external funding.
False
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To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.
False
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Which of the following is NOT one of the steps taken in the financial planning process?
A. Assumptions are made about future levels of sales, costs, and interest rates for use in the forecast.
B. The entire financial plan is reexamined, assumptions are reviewed, and the management team considers how additional changes in operations might improve results.
C. Projected ratios are calculated and analyzed. D. Develop a set of projected financial statements.
E. Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
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Which of the following statements is CORRECT?
A. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A*0/S0 and L*0/S0) vary from year to year in a stable, predictable manner.
B. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.
C. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in the financial forecasting process.
D. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets
. E. Regression techniques cannot be used in situations where excess capacity or economies of scale exist.
Which of the following statements is CORRECT?
A. The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.
B. If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative.
C. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm’s actual AFN must, mathematically, exceed the previously calculated AFN.
D. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
E. Dividend policy does not affect the requirement for external funds based on the AFN equation.
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