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.
G) A) and D)
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A) Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
B) Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
C) If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
D) Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
E) If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
G) A) and E)
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A) $74.81
B) $78.75
C) $82.69
D) $86.82
E) $91.16
G) A) and C)
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B) False
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A) $74.6
B) $78.5
C) $82.7
D) $87.0
E) $91.4
G) A) and E)
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A) Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals.
B) A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
C) Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
D) A firm's mission statement defines its lines of business and geographic area of operations.
E) The corporate scope is a condensed version of the entire set of strategic plans.
G) B) and D)
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C
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B) False
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A) 3.40
B) 3.57
C) 3.75
D) 3.94
E) 4.14
G) A) and B)
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A) $170.09
B) $179.04
C) $188.46
D) $197.88
E) $207.78
G) A) and C)
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A) The mission statement.
B) The statement of the corporation's scope.
C) The statement of cash flows.
D) The statement of corporate objectives.
E) The operating plan.
G) A) and E)
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A) Assets required per dollar of sales.
B) A forecasting approach in which the forecasted percentage of sales for each item is held constant.
C) Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.
D) Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include spontaneous increases in accounts payable and accruals.
E) The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth.
G) D) and E)
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A) $31.9
B) $33.6
C) $35.3
D) $37.0
E) $38.9
G) A) and E)
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A) The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.
B) The company increases its dividend payout ratio.
C) The company begins to pay employees monthly rather than weekly.
D) The company's profit margin increases.
E) The company decides to stop taking discounts on purchased materials.
G) A) and C)
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A) $102.8
B) $108.2
C) $113.9
D) $119.9
E) $125.9
G) A) and B)
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B) False
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A) Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.
B) The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet.
C) Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.
D) A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed.
E) If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the AFN method will provide more accurate forecasts than the projected financial statement method.
G) A) and C)
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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.
G) D) and E)
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A) All balance sheet accounts are tied directly to sales.
B) Accounts payable and accruals are tied directly to sales.
C) Common stock and long-term debt are tied directly to sales.
D) Fixed assets, but not current assets, are tied directly to sales.
E) Last year's total assets were not optimal for last year's sales.
G) A) and C)
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B
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A) A sharp increase in its forecasted sales.
B) A sharp reduction in its forecasted sales.
C) The company reduces its dividend payout ratio.
D) The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
E) The company discovers that it has excess capacity in its fixed assets.
G) A) and E)
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A
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B) False
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