The percentage of sales method is based on which of the
following assumptions?
A. a. All balance
sheet accounts are tied directly to sales.
B. b. Most balance
sheet accounts are tied directly to sales.
C. c. The current
level of total assets is optimal for the current sales level.
D. d. Answers a and c
above.
E. e. Answers b and c
above.
Question 2 of 20
The percentage of sales method produces accurate results
unless which of the following conditions is (are) present?
A. a. Fixed assets
are “lumpy.”
B. b. Strong
economies of scale are present.
C. c. Excess capacity
exists because of a temporary recession.
D. d. Answers a, b,
and c all make the percentage of sales method inaccurate.
E. 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.
Question 3 of 20
Which of the following statements is correct?
A. 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. b. The first, and
most critical, step in constructing a set of pro forma financial statements is
establishing the sales forecast.
C. c. Pro forma
financial statements as discussed in the text are used primarily to assess a
firm’s historical performance.
D. 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. e. The percentage
of sales method produces accurate results when fixed assets are lumpy and when
economies of scale are present
Question 4 of 20
Considering each action independently and holding other
things constant, which of the following actions would reduce a firm’s need for
additional capital?
A. a. An increase in
the dividend payout ratio.
B. b. A decrease in
the profit margin.
C. c. A decrease in
the days sales outstanding.
D. d. An increase in
expected sales growth.
E. e. A decrease in
the accrual accounts (accrued wages and taxes).
Question 5 of 20
Which of the following statements is correct?
A. a. Since accounts
payable and accruals must eventually be paid, as these accounts increase, AFN
also increases.
B. b. Suppose a firm
is operating its fixed assets below 100 percent capacity but is at 100 percent
with respect to current assets. If sales grow, the firm can offset the needed
increase in current assets with its idle fixed assets capacity.
C. c. If a firm
retains all of its earnings, then it will not need any additional funds to
support sales growth.
D. d. Additional
funds needed are typically raised from some combination of notes payable,
long-term bonds, and common stock. These accounts are nonspontaneous in that
they require an explicit financing decision to increase them.
E. e. All of the
statements above are false.
Question 6 of 20
Which of the following statements is correct?
A. a. Any forecast of
financial requirements involves determining how much money the firm will need
and is obtained by adding together increases in assets and spontaneous
liabilities and subtracting operating income.
B. b. The percentage
of sales method of forecasting financial needs requires only a forecast of the
firm’s balance sheet. Although a forecasted income statement helps clarify the
need, it is not essential to the percentage of sales method.
C. c. Because
dividends are paid after taxes from retained earnings, dividends are not
included in the percentage of sales method of forecasting.
D. d. Financing
feedbacks describe the fact that interest must be paid on the debt used to help
finance AFN and dividends must be paid on the shares issued to raise the equity
part of the AFN. These payments would lower the net income and retained
earnings shown in the projected financial statements.
E. e. All of the
statements above are false.
Question 7 of 20
Which of the following statements is correct?
A. a. Inherent in the
AFN formula is the assumption that each asset item must increase in direct
proportion to sales increases and that spontaneous liability accounts also grow
at the same rate as sales.
B. b. If a firm has
positive growth in its assets, but has no increase in retained earnings, AFN
for the firm must be positive.
C. c. Using the AFN
formula, if a firm increases its dividend payout ratio in anticipation of
higher earnings, but sales actually decrease, the firm will automatically
experience an increase in additional funds needed.
D. d. Higher sales
usually require higher asset levels. Some of the increase in assets can be
supported by spontaneous increases in accounts payable and accruals, and by
increases in certain current asset accounts and retained earnings.
E. e. Dividend policy
does not affect requirements for external capital under the AFN formula method.
Question 8 of 20
Jill’s Wigs Inc. had the following balance sheet last year:
Cash 800 Accounts Payable 350
Accounts Receivable 450 Accrued Wages 150
Inventories 950 Notes Payable 2,000
Fixed Assets 34,000 Mortgage 26,500
Common
Stock 3,200
Retained
earnings 4,000
Total Assets 36,200 Total liabilites and equity 36,200
Jill has just invented a non-slip wig for men which she
expects will cause sales to double from $10,000 to $20,000, increasing net
income to $1,000. She feels that she can handle the increase without adding any
fixed assets. (1) Will Jill need any outside capital if she pays no dividends?
(2) If so, how much?
A. a. No; zero
B. b. Yes; $7,700
C. c. Yes; $1,700
D. d. Yes; $700
E. e. No; there will
be a $700 surplus.Quest 9 to 20Question 9 of 20 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 percent 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
percent, 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 percent. Based on the AFN formula, how much
additional capital must the company raise in order to support the 20 percent
increase in sales? A. a. $ 2.0 million B. b. $ 6.0 million C. c. $ 8.4 million D. d. $ 9.6 million E. e. $14.0 millionQuestion 10 of 20 Splash Bottling’s December 31st balance sheet is given
below:Cash 10 Accounts payable 15Accounts Receivable 25 Notes payable 20Inventories 40 Accrued wages and taxes 15Net fixed assets 75 Long-term debt 30 Common
equity 70Total assets 150 Total liabilities and equity 150Sales during the past year were $100, and they are expected
to rise by 50 percent to $150 during next year. Also, during last year fixed
assets were being utilized to only 85 percent of capacity, so Splash could have
supported $100 of sales with fixed assets that were only 85 percent of last
year’s actual fixed assets. Assume that Splash’s profit margin will remain
constant at 5 percent and that the company will continue to pay out 60 percent
of its earnings as dividends. To the nearest whole dollar, what amount of
nonspontaneous, additional funds (AFN) will be needed during the next year? A. a. $57 B. b. $51 C. c. $36 D. d. $40 E. e. $48Reset SelectionQuestion 11 of 20 Which of the following would reduce the additional funds
required if all other things are held constant? A. a. An increase in
the dividend payout ratio. B. b. A decrease in
the profit margin. C. c. An increase in
the capital intensity ratio. D. d. An increase in
the expected sales growth rate. E. e. A decrease in
the firm’s tax rate.Question 12 of 20 Which of the following statements is correct? A. a. Suppose
economies of scale exist in a firm’s use of assets. Under this condition, the
firm should use the regression method of forecasting asset requirements rather
than the percent of sales method. B. b. If a firm must
acquire assets in lumpy units, it can avoid errors in forecasts of its need for
funds by using the linear regression method of forecasting asset requirements
because all the points will lie on the regression line. C. c. If economies of
scale in the use of assets exist, then the AFN formula rather than the percent
of sales method should be used to forecast additional funds requirements. D. d. Notes payable
to banks are included in the AFN formula, along with a projection of retained
earnings. E. e. One problem
with the AFN formula is that it does not take account of the firm’s dividend
policy.Question 13 of 20 Elvis Inc. has the following balance sheet:Current assets $5,000 Accounts payable $1,000 Notes
payable 1,000Net fixed assets 5,000 Long-term debt 4,000 Common
equity 4,000Total assets $10,000 Total liabilities and equity $10,000Business has been slow; therefore, fixed assets are vastly
underutilized. Get research paper samples and course-specific study resources under homework for you course hero writing service – Manage ment believes it can triple sales next year with the
introduction of a new product. No new fixed assets will be required, and
management expects that there will be no earnings retained next year. What is
next year’s additional financing requirement? A. a. $3,500 B. b. $4,600 C. c. $5,900 D. d. $8,000 E. e. $10,000Question 14 of 20 The 2007 balance sheet for Laura Inc. is shown below (in
millions of dollars): Cash $
3.0 Accounts payable $ 2.0Accounts receivable 3.0 Notes payable 1.5Inventory 5.0 Current Assets $11.0 Current liabilities $ 3.5Fixed assets 3.0 Long-term debt 3.0 Common
equity 7.5Total assets $14.0 Total liabilities and
equity $14.0In 2007, sales were $60 million. In 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers, management
believes that sales will increase by 30 percent to a total of $78 million. The
profit margin is expected to be 6 percent, and the retention ratio is targeted
at 40 percent. No excess capacity exists. What is the additional financing
requirement (in millions) for 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers using the formula method? A. a. $1.73 B. b. $6.67 C. c. $18.2 D. d. -$6.67 E. e. -$1.73Question 15 of 20 The 2007 balance sheet for Laura Inc. is shown below (in
millions of dollars): Cash $
3.0 Accounts payable $ 2.0Accounts receivable 3.0 Notes payable 1.5Inventory 5.0 Current Assets $11.0 Current liabilities $ 3.5Fixed assets 3.0 Long-term debt 3.0 Common
equity 7.5Total assets $14.0 Total liabilities and
equity $14.0In 2007, sales were $60 million. In 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers, management
believes that sales will increase by 30 percent to a total of $78 million. The
profit margin is expected to be 6 percent, and the retention ratio is targeted
at 40 percent. No excess capacity exists. How much can sales grow above the
2007 level of $60 million without requiring any additional funds? A. a. 10.34% B. b. 13.64% C. c. 14.83% D. d. 15.63% E. e. 19.17%Question 16 of 20 Smith Machines Inc. has a net income this year of $500 on
sales of $2,000 and is operating its fixed assets at full capacity. Get research paper samples and course-specific study resources under homework for you course hero writing service – Manage ment
expects sales to increase by 50 percent next year and is forecasting a dividend
payout ratio of 30 percent. The profit margin is not expected to change. If
spontaneous liabilities are $500 this year and no excess funds are expected
next year, what are Smith’s total assets this year? A. a. $ 1,250 B. b. $1,550 C. c. $2,750 D. d. $3,425 E. e. $3,574Question 17 of 20 Bill Inc.’s 2007 financial statements are shown below:Bill Inc. Balance Sheet as of December 31, 2007 Cash $
90,000 Accounts
payable $
180,000Receivables 180,000 Notes payable 78,000Inventory 360,000 Accruals 90,000Total current assets $630,000 Total current
liabilities $ 348,000 Common
stock 900,000Net fixed assets 720,000 Retained earnings 102,000Total assets $1,350,000 Total liabilities and
equity $1,350,000Bill Inc. Income Statement for December 31, 2007Sales $1,800,000Operating costs 1,639,860EBIT $
160,140Interest 10,140EBT $
150,000Taxes (40%) 60,000Net income $90,000 Dividends (60%) $
54,000Addition to retained earnings $ 36,000Suppose that in 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers, sales increase by 20 percent over 2007
sales. Construct the pro forma financial statements using the percent of sales
method. Assume the firm operated at full capacity in 2007. How much additional
capital will be required? A. e. $263,921 B. b. $95,288 C. c. $100,251 D. d. $172,313 E. e. $263,921Question 18 of 20Bill Inc. Balance Sheet as of December 31, 2007 Cash $
90,000 Accounts
payable $
180,000Receivables 180,000 Notes payable 78,000Inventory 360,000 Accruals 90,000Total current assets $
630,000 Total
current liabilities $
348,000 Common
stock 900,000Net fixed assets 720,000 Retained earnings 102,000Total assets $1,350,000 Total liabilities and
equity $1,350,000Bill Inc. Income Statement for December 31, 2007 Sales $1,800,000Operating costs 1,639,860EBIT $
160,140Interest 10,140EBT $
150,000Taxes (40%) 60,000Net income $
90,000 Dividends (60%) $
54,000Addition to retained earnings $ 36,000Suppose that in 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers, sales increase by 20 percent over 2007
sales. Assume that fixed assets are only being operated at 95 percent of
capacity. Construct the proforma financial statements using the percent of
sales method. How much additional capital will be required? A. a. $73,218 B. b. $85,201 C. c. $91,873 D. d. $100,800E. e. $129,113Question 19 of 20 Your company’s sales were $2,000 last year, and they are
forecasted to rise by 100 percent during the coming year. Here is the latest
balance sheet:Cash $
100 Accounts payable $200Receivables 300 Notes payable 200Inventory 800 Accruals 20Total current assets $1,200 Total current liabilities $420 Long-term
debt 780 Common
stock 400Net Fixed Assets 800 Retained earnings 400Total assets $2,000 Total liabilities and equity $2,000Fixed assets were used to only 80 percent of capacity last
year, and year-end inventory holdings were $100 greater than were needed to
support the $2,000 of sales. The other current assets (cash and receivables)
were at their proper levels. All assets would be a constant percentage of sales
if excess capacity did not exist; that is, all assets would increase at the
same rate as sales if no excess capacity existed. The company’s after-tax
profit margin will be 3 percent, and its payout ratio will be 80 percent. If
all additional funds needed (AFN) are raised as notes payable and financing
feedbacks are ignored, what will the current ratio be at the end of the coming
year? A. a. 1.17 B. b. 1.93 C. c. 2.19 D. d. 2.50 E. e. 2.73Question 20 of 20 The Bouchard Company’s sales are forecasted to increase from
$500 in 2007 to $ 1,000 in 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers. Here is the December 31, 2007, balance sheet:Cash $
50 Accounts payable $25Receivables 100 Notes payable 75Inventory 100 Accruals 25Total current assets $250 Total current liabilities $125 Long-term
debt 200 Common
stock 50Net Fixed Assets 250 Retained earnings 125Total assets $500 Total liabilities and
equity $500Bouchard’s fixed assets were used to only 50 percent of
capacity during 2007, but its current assets were at their proper levels. All
assets except fixed assets should be a constant percentage of sales, and fixed
assets would also increase at the same rate if the current excess capacity did
not exist. Bouchard’s after-tax profit margin is forecasted to be 8 percent,
and its payout ratio will be 40 percent. What is Bouchard’s additional funds
needed (AFN) for the coming year? A. a. $102 B. b. $152 C. c. $197 D. d. $167 E. e. $183
