International University of Rabat

Rabat Business School

FI302E - Financial Markets & Risk Management
SPRING 2023
Instructor: Dr. Ahmed Imran Hunjra
Practice Question of “Financial Statement Forecasting”
Question-1:
Jasper Furnishings has $300 million in sales. The company expects that its sales will increase 12
percent this year. Jasper’s CFO uses a simple linear regression to forecast the company’s inventory
level for a given level of projected sales. On the basis of recent history, the estimated relationship
between inventories and sales (in millions of dollars is,
Inventories = $25 + 0.125(Sales).
Given the estimated sales forecast and the estimated relationship between inventories and sales,
what is your forecast of the company’s year-end inventory turnover ratio?
Solution:
Sales = $300,000,000; g Sales = 12%; Inv. = $25 + 0.125(Sales)
S1 = $300,000,000 x 1.12 = $336,000,000
Inv. = $25 + 0.125($336)
= $67 million
Sales/Inv. = $336,000,000/$67,000,000
 5.0149
= 5.01

Question-2:
Spark Labs Furnishings has $400 million in sales. The company expects that its sales will increase
15 percent this year. Spark Lab’s CFO uses a simple linear regression to forecast the company’s
inventory level for a given level of projected sales. On the basis of recent history, the estimated
relationship between inventories and sales (in millions of dollars is,
Inventories = $30 + 0.125(Sales).
Given the estimated sales forecast and the estimated relationship between inventories and sales,
what is your forecast of the company’s year-end inventory turnover ratio?
Solution:
Sales = $400,000,000; g Sales = 15%; Inv. = $25 + 0.125(Sales)
S1 = $400,000,000 x 1.15 = $460,000,000
Inv. = $30 + 0.125($460)
= $87.5 million
Sales/Inv. = $460,000,000/$87,500,000
= 5.25

Question-3:
Bloom Work Furnishings has $500 million in sales. The company expects that its sales will
increase 13 percent this year. Bloom Work’s CFO uses a simple linear regression to forecast the
company’s inventory level for a given level of projected sales. On the basis of recent history, the
estimated relationship between inventories and sales (in millions of dollars is,

Inventories = $27 + 0.135(Sales).

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Given the estimated sales forecast and the estimated relationship between inventories and sales,
what is your forecast of the company’s year-end inventory turnover ratio?
Solution:
Sales = $500,000,000; g Sales = 13%; Inv. = $27 + 0.135(Sales)
S1 = $500,000,000 x 1.13 = $565,000,000
Inv. = $27 + 0.135($565)
= $103.275 million
Sales/Inv. = $565,000,000/$103,275,000
= 5.47

Question-4:
Nova Furnishings has $600 million in sales. The company expects that its sales will increase 14
percent this year. Nova’s CFO uses a simple linear regression to forecast the company’s inventory
level for a given level of projected sales. On the basis of recent history, the estimated relationship
between inventories and sales (in millions of dollars is,
Inventories = $35 + 0.145(Sales).
Given the estimated sales forecast and the estimated relationship between inventories and sales,
what is your forecast of the company’s year-end inventory turnover ratio?
Solution:
Sales = $600,000,000; g Sales = 14%; Inv. = $35 + 0.145(Sales)
S1 = $600,000,000 x 1.14 = $684,000,000
Inv. = $35 + 0.145($684)
= $134.18 million
Sales/Inv. = $684,000,000/$134,180,000
 5.09
= 5.1

Question-5:
Walter Industries has $5 billion in sales and $1.7 billion in fixed assets. Currently, the company’s
fixed assets are operating at 90 percent of capacity.
 What level of sales could Walter Industries have obtained if it had been operating at full
capacity?
 What is Walter’s target fixed assets/sales ratio?
 If Walter’s sales increase 12 percent, how large of an increase in fixed assets would the
company need in order to meet its target fixed assets/sales ratio?
Solution:
Sales = $5,000,000,000; FA = $1,700,000,000
FA are operated at 90% capacity
Full capacity sales = $5,000,000,000/0.90
= $5,555,555,556
a)
Target FA/S ratio = $1,700,000,000/$5,555,555,556
= 30.6%
b)
Sales increase 12%; FA =?
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S1 = $5,000,000,000 x 1.12
= $5,600,000,000
c)
No increase in FA up to $5,555,555,556
FA = 0.306 x ($5,600,000,000 - $5,555,555,556)
= 0.306 x ($44,444,444)
= $13,600,000

Question-6:
Brandingo Industries has $6 billion in sales and $1.8 billion in fixed assets. Currently, the
company’s fixed assets are operating at 80 percent of capacity.
 What level of sales could Brandingo Industries have obtained if it had been operating at full
capacity?
 What is Brandingo’s target fixed assets/sales ratio?
 If Brandingo’s sales increase 30 percent, how large of an increase in fixed assets would the
company need in order to meet its target fixed assets/sales ratio?
Solution:
Sales = $6,000,000,000; FA = $1,800,000,000
FA are operated at 80% capacity
Full capacity sales = $6,000,000,000/0.80
= $7,500,000,000
a)
Target FA/S ratio = $1,800,000,000/$7,500,000,000
= 24%
b)
Sales increase 30%; FA =?
S1 = $6,000,000,000 x 1.30
= $7,800,000,000
c)
No increase in FA up to $7,500,000,000
FA = 0.24 x ($7,800,000,000 - $7,500,000,000)
= 0.24 x ($300,000,000)
= $72,000,000

Question-7:
Formony Industries has $7 billion in sales and $1.9 billion in fixed assets. Currently, the
company’s fixed assets are operating at 70 percent of capacity.
 What level of sales could Formony Industries have obtained if it had been operating at full
capacity?
 What is Formony’s target fixed assets/sales ratio?
 If Formony’s sales increase 50 percent, how large of an increase in fixed assets would the
company need in order to meet its target fixed assets/sales ratio?
Solution:
Sales = $7,000,000,000; FA = $1,900,000,000
FA are operated at 70% capacity
Full capacity sales = $7,000,000,000/0.70
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= $10,000,000,000
a)
Target FA/S ratio = $1,900,000,000/$10,000,000,000
= 19%
b)
Sales increase 50%; FA =?
S1 = $7,000,000,000 x 1.50
= $10,500,000,000
c)
No increase in FA up to $10,000,000,000
FA = 0.19 x ($10,500,000,000 - $10,000,000,000)
= 0.19 x ($500,000,000)
= $95,000,000

Question-8:
Mediciny Industries has $8 billion in sales and $1.6 billion in fixed assets. Currently, the
company’s fixed assets are operating at 85 percent of capacity.
 What level of sales could Mediciny Industries have obtained if it had been operating at full
capacity?
 What is Mediciny’s target fixed assets/sales ratio?
 If Mediciny’s sales increase 35 percent, how large of an increase in fixed assets would the
company need in order to meet its target fixed assets/sales ratio?
Solution:
Sales = $8,000,000,000; FA = $1,600,000,000
FA are operated at 80% capacity
Full capacity sales = $8,000,000,000/0.80
= $10,000,000,000
a)
Target FA/S ratio = $1,600,000,000/$10,000,000,000
= 16%
b)
Sales increase 35%; FA =?
S1 = $8,000,000,000 x 1.35
= $10,800,000,000
c)
No increase in FA up to $10,000,000,000
FA = 0.16 x ($10,800,000,000 - $10,000,000,000)
= 0.16 x ($800,000,000)
= $128,000,000

UIR Campus, Technopolis Park, Rocade de Rabat-Salé 11100 - Sala Al Jadida - Morocco