BFIN Chapter 15

Country Furniture has current assets of $13,000 and fixed assets of $47,000. Sales are $71,000 this year and are expected to be $84,000 next year. The firm is currently operating at full capacity so $14,000 of new equipment must be purchased for sales to increase. What is the necessary increase in assets?

$16,380.28

Assume the monthly sales for September through December for the current year have been $30,000, $34,000, $38,000, and $31,000, respectively. What value should be used for the monthly sales for the upcoming year based on the naive approach?

$31,000

Which one of these correctly defines the necessary increase in assets formula?

(Assets tied directly to sales/Current sales) × Projected increase in sales

A firm has a profit margin of 4.5 percent and a dividend payout ratio of 40 percent. The projected sales level is $112,000. How is the projected increase in retained earnings computed?

0.045 × $112,000 × (1 - 0.40)

Assume you know the monthly sales revenue for the past 24 months. What will be the value of n in the MAPE formula if you compute the MAPE for a 6-month period?

6

True or false: If MAPE indicates that a particular forecast method worked well in the past, then you can be assured it will also work well in the future.

False

What does MAPE stand for?

Mean absolute percentage error

What is the third step in the deseasonalization process?

Predict sales

Which one of these serves as the basis for financial planning?

Pro forma financial statements

How is the projected increase in retained earnings computed?

Profit margin × Projected sales × Retention ratio

How is the necessary increase in assets formula revised to accommodate "lumpy" assets?

Required increase in fixed assets + (A*/S0) × ΔS.

Rex's has total assets of $41,000 and fixed assets of $26,000. Sales are currently $51,000 and are expected to increase by 6 percent next year. The firm has sufficient fixed assets to increase sales by 20 percent. How is the necessary increase in assets computed?

[($41,000 - $26,000)/$51,000] × (0.06 × $51,000)

A firm's financial statements show current assets of $6,300, fixed assets of $36,100, and sales of $52,000. Sales are expected to increase by 5 percent. All assets are directly tied to sales. How is the necessary increase in assets computed?

[($6,300 + $36,100)/$52,000] × (0.05 × $52,000) Reason: Necessary increase in assets = (A*/S0) × ΔS

A more complete calculation of AFN should involve _______ references, for example, AFN is a function of retained earnings, but where retained earnings are a function of AFN.

circular

The naive approach might work best with a firm with ______ sales levels.

stable

Max's has total assets of $98,000 and current assets of $21,000. Sales are $102,000 and are expected to increase to $110,000 next year. The firm has sufficient fixed assets to support $115,000 in sales. What is the necessary increase in assets?

$1,647.06

A firm has current sales of $19,000, projected sales of $21,000, and current liabilities of $4,500. The capital intensity ratio is 0.85, the profit margin is 6 percent, and the retention ratio is 65 percent. What is the AFN if all the assets and current liabilities are directly related to sales?

$407.32 Reason: AFN = [0.85 × ($21,000 - $19,000)] - [($4,500/$19,000) × ($21,000 - $19,000)] - (0.06 × $21,000 × 0.65) = $407.32

A firm has current sales of $66,000, which are expected to increase by 20 percent next year. Accounts payables are $18,000 and long-term debt is $32,000. How is the spontaneous increase in liabilities computed?

($18,000/$66,000) × (0.20 × $66,000)

Uptown Stores has current sales of $91,000 and expected sales of $85,000. Current assets are $27,500, which vary directly with sales. Fixed assets have excess capacity. How is the necessary increase in assets computed?

($27,500/$91,000) × ($85,000 - $91,000)

Leo's Flights has current annual sales of $386,000 and expected sales for next year of $457,000. Assets are $354,000, all of which are directly tied to sales. How is the necessary increase in assets computed?

($354,000/$386,000) × ($457,000 - $386,000)

Parker's Market has current sales of $39,000 which are expected to increase by $8,000 next year. The firm's current liabilities are $7,200 of which $1,200 is notes payable and $6,000 is accounts payable. How is the spontaneous increase in liabilities computed?

($6,000/$39,000) × $8,000

A firm has current sales of $20,000, projected sales of $21,000, and current liabilities of $5,000. The capital intensity ratio is 0.85, the profit margin is 6%, and the retention ratio is 75%. What is the AFN if all the assets and current liabilities are directly related to sales?

-$1,841 Reason: AFN = [0.85 × ($19,000 - $20,000)] - [($5,000/$20,000) × ($19,000 - $20,000)] - (0.06 × $19,000 × 0.65) = -$1841

Sales for M&T Industries are expected to increase by 10 percent next year over this year's $38,000. The firm has a retention ratio of 70 percent and a profit margin of 6 percent. How is the projected increase in retained earnings computed?

0.06 × [(1 + 0.10) × $38,000] × 0.70

Which of these correctly identify changes occurring in the iterative process of computing AFN using pro forma statements? Select all that apply.

A change in retained earnings changes the AFN. A change in AFN changes common stock and long-term debt. A change in interest expense changes taxes, net income, and retained earnings.

The naive approach to sales forecasting will tend to work best for which one of these situations?

A firm with fairly level sales

By the end of the second step in the process of computing AFN using pro forma statements what will be accomplished?

A first pass of AFN based on the initial impact from a change in sales will be completed

Which one of these is an indication that the average approach provides a better estimate of future sales than does the naive approach?

A lower MAPE value

Which of these statements related to the AFN formula is correct? Select all that apply.

A negative AFN indicates that external financing can be lowered from its current level if the new level of sales is achieved. Both internal funds and trade credit will help fund the assets needed to support sales but that funding may or may not be sufficient.

How is the necessary increase in assets modified when unused capacity exists?

A* is the portion of assets that would need to change

Which one of these liabilities is most apt to be included in L* in the spontaneous increase in liabilities formula?

Accounts payable

Which one of these AFN formula assumptions regarding all accounts that change directly with sales can create a problem?

All changes are a linear function of sales

The AFN formula approach considers which of these?

All first order effects

What is a "lumpy" asset?

An asset that is nondivisible and generally creates excess capacity

Why is retained earnings a function of AFN?

Any debt financing of AFN affects the interest expense, net income, and retained earnings.

Assume a firm changes in business policy regarding the granting of credit to customers. Which one of these ratios might help in understand the impact of that change on the AFN process?

Average collection period

What is the second step of the deseasonalization process?

Calculate the trend using linear regression on the deseasonalized sales figures

Assume a firm has sufficient fixed assets to accommodate the projected increase in sales. How will the capital intensity ratio be computed in this case?

Current assets/Current sales

The Corner Market has compiled its monthly sales for 2012 through 2014. Assume it is January 1, 2014 and you use the naive approach for estimating sales. When computing MAPE for the 2014 year, what value should be used as the forecast variable in the MAPE formula?

December 2013 sales

Which one of these will increase the value of the projected increase in retained earnings?

Decrease in the tax rate

When using the average approach to estimating sales, what caution needs to be observed when a perceived shift has occurred in historical sales values?

Discarding a subset of values due to a perceived shift may lower the accuracy of the forecast value

How is the seasonal index computed during the process of deseasonalizing historic sales?

Divide each month's sales by a moving average around that month of annual sales

Which one of these is the first value estimated when starting to form a financial plan?

Expected future sales

What type of financing need is the additional funds needed (AFN)?

External financing

What assumption does the average approach make concerning future expected sales?

Future sales will be equal to the average historical sales for some relevant period

The naive approach is based on which one of these assumptions?

Future sales will equal those of the latest observed period

Which of these can be classified as a seasonal effect? Select all that apply.

Holiday sales A quarterly pattern in sales Reduced sales due to winter conditions

What is the name of the type of errors the average approach is designed to reduce as compared to the naive approach?

Idiosyncratic errors

Which one of these is the spontaneous liabilities ratio portion of the spontaneous increase in liabilities formula?

L*/S0

Which of these are most likely "lumpy" assets? Select all that apply.

Manufacturing equipment Real estate

Which one of these is the best guideline for determining the historical period to be used to compute the average forecast value?

More observations are better but only if the sample is representative of the population

Which of these are correct as they apply to the projected increase in retained earnings formula? Select all that apply.

RR is the retention ratio S1 = S0 + ΔS M is the profit margin

Which one of these accounts creates a circular reference when forecasting financial statements?

Retained earnings

Which one of these indicates a firm's sales are affected by seasonality?

Sales are consistently lower in one particular month each year

In the necessary increase in assets formula, what does A* represent?

The amount of assets tied directly to sales

Which of these are questions that are addressed by a financial plan? Select all that apply.

The amount of new assets which must be acquired The amount of external funding needed in excess of supplier funding The expected increase in supplier funding

What are base case assumptions?

The most reasonable set of assumptions upon which a firm's financial plan is based

Base case projections are intended to represent which one of these?

The outcome most expected by a firm

What is the definition of financial planning?

The process of mapping out the future cash inflows and outflows of a firm

Which one of these best explains the key purpose of the deseasonalizing of sales?

To remove the seasonal effects so that the underlying trend can be determined

Why does an increase in expected sales create an additional funds need? Select all that apply.

Trade credit may be insufficient to fund materials purchases Sales must be supported by assets. Increased sales increase accounts receivable

Which of these questions are addressed in the third step of the AFN using pro forma statements process? Select all that apply.

Which balance sheet or income statement account will be used as the plug variable? What should the debt-to-equity ratio be? What should the short-term to long-term debt ratio be?

If a projected increase in sales will spontaneously be fully funded, what will be the AFN value?

Zero or negative

This ratio relates accounts receivable to credit sales is called the average ______ period

collection

In general, more observations are better only if the sample is ______ of the population.

representative