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Finance AFN MCQs

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1. F. Marston, Inc. has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?

a. A switch to a just-in-time inventory system and outsourcing production.
b. The company reduces its dividend payout ratio.
c. 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.
d. The company discovers that it has excess capacity in its fixed assets.
e. A sharp increase in its forecasted sales.

2. The term "additional funds needed (AFN)" is generally defined as follows:

a. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
b. The amount of assets required per dollar of sales.
c. The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
d. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
e. Funds that are obtained automatically from routine business transactions.

3. The capital intensity ratio is generally defined as follows:
a. The percentage of liabilities that increase spontaneously as a percentage of sales.
b. The ratio of sales to current assets.
c. The ratio of current assets to sales.
d. The amount of assets required per dollar of sales, or A0*/S0.
e. Sales divided by total assets, i.e., the total assets turnover ratio.

4. Which of the following is NOT one of the steps taken in the financial planning process?
a. Monitor operations after implementing the plan to spot any deviations and then take corrective actions.
b. Determine the amount of capital that will be needed to support the plan.
c. Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
d. 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.
e. Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.

5. Spontaneous funds are generally defined as follows:
a. A forecasting approach in which the forecasted percentage of sales for each item is held constant.
b. Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
c. Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.
d. 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.

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1. e. A sharp increase in its forecasted sales.

2. a. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by ...

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