Chapter # 14 Questions

14.1) Define each of the following terms:  -Operating Plan The operating plan is that plan which provides detailed implementation guidance designed to accomplish corporate objectives. It details who is responsible for what particular function, and when specific tasks are to be accomplished.  - Financial Plan The plan which shows the financial aspects of the corporation¶s operating plan. In addition to an analysis of the firm¶s current financial condition, the financial plan normally includes a sales forecast, the capital budget, the cash budget, pro forma financial statements, and the external financing plan.  - Sales Forecast A sales forecast is merely the forecast of unit and dollar sales for some future period. Of course, a lot of work is required to produce a good sales forecast.  -Pro Forma Financial Statement A pro forma financial statement shows how an actual statement would look if certain assumptions are realized.  -Percent of sales method The percent of sales method, many items on the income statement and balance sheets are assumed to increase proportionally with sales. As sales increase, these items that are tied to sales also increase, and the values of these items for a particular year are estimated as percentages of the forecasted sales for that year.  -Spontaneously Generated Funds Spontaneously generated funds are those funds when a liability account increases spontaneously (automatically) as sales increase. An increase in a liability account is a source of funds, thus funds have been generated. Two examples of spontaneous liability accounts are accounts payable and accrued wages. Note that notes payable, although a current liability account, is not a spontaneous source of funds since an increase in notes payable requires a specific action between the firm and a creditor.

However. A sales increase will normally require an increase in assets. -Additional Funds Needed Additional funds needed (AFN) are those funds required from external sources to increase the firm¶s assets to support a sales increase.  -Additional Funds Needed Formula AFN ! . Those funds that are required but not generated internally must be obtained from external sources. some of this increase is usually offset by a spontaneous increase in liabilities as well as by earnings retained in the firm.

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The capital intensity ratio is the reciprocal of the total assets turnover ratio. but require large. 14. accrued wages. Put check mark by those items that typically increase spontaneiously: a) Accounts Payable _________________ b) Mortgage Bonds_____________________ b) Notes Payable to banks_____________ d) Common Stock______________________ e) Accrued Wages____________________ f) Retained Earnings_____________________ g) Accrued Taxes_____________________ Solution: Accounts payable. at least not economically. and accrued taxes increase spontaneously and proportionately with sales. For example.2) Certain liability and net worth items generally increase spontaneously with increases in sales. discrete additions.L * / So (S  MS1 (1  d )  -Capital Intensity Ratio Capital intensity is the dollar amount of assets required to produce a dollar of sales. Retained Earnings. .  -Lumpy Assets Lumpy assets are those assets that cannot be acquired smoothly. an electric utility that is operating at full capacity cannot add a small amount of generating capacity.

be used to forecast financial requirements: AFN ! . under certain assumptions.3) The following equation can.14.

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4) suppose a firm makes the following policy changes.L * / So (S  MS1 (1  d ) Under what conditions does the equation give satisfactory predictions. it should not be used. and when it should not be used? Solution: The equation gives good forecasts of financial requirements if the ratios A*/S and L*/S. ___________ ____________ ____________ ___________ . Otherwise. 14. as well as M and d. are stable. b) The Firm decides to pay all suppliers on delivery. to take advantage of discounts for payment. indicate a decrease by a (-). rather than after a 30-day delay. and indicate indeterminate or on effect by a (0). sales are steady. c) The firm begins to sell on credit(previously all sales had been On a cash basis) d) The firm¶s profit margin is eroded by increased competition. indicate this by a (+). If the change means that external. short-run effect on funds requirements. nonspontaneous financial requirements (AFN) will increase. Think in terms of the immediate. a) The dividend payout ratio is increased.