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CHAPTER 9
FINANCIAL PLANNING AND FORECASTING FINANCIAL
STATEMENTS
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject
lines.
Multiple Choice: True/False

(9.1) Mission statement F K Answer: a EASY
1. The mission statement is a statement of the firm's overall purpose.
a. True
b. False
(9.1) Corporate strategies F K Answer: b EASY

2. Once a firm has defined its purpose, scope, and objectives, it must
develop a strategy for achieving its goals. Corporate strategies are
detailed plans rather than broad approaches.
a. True
b. False
(9.2) Sales forecast F K Answer: a EASY

3. The first, and most critical, step in constructing a set of forecasted
financial statements is the sales forecast.
a. True
b. False
(9.2) Sales forecast F K Answer: a EASY

4. A typical sales forecast, though concerned with future events, will
usually be based on recent historical trends and events as well as on
forecasts of economic prospects.
a. True
b. False
(9.2) Sales forecast F K Answer: b EASY

5. Errors in the sales forecast can be offset by similar errors in costs
and income forecasts. Thus, as long as the errors are not large, sales
forecast accuracy is not critical to the well being of the firm.
a. True
b. False
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Chapter 9: Forecasting True/False Page 271

(9.3) Spontaneous liabilities F K Answer: a EASY
6. As a firm's sales grow, its current assets also tend to increase. For
instance, as sales increase, the firm's inventories generally increase,
and purchases of inventories result in more accounts payable. Thus,
spontaneous liabilities that reduce AFN arise from transactions brought
on by sales increases.
a. True
b. False
(9.3) Spontaneous liabilities F K Answer: b EASY

7. Firms pay a low interest rate on spontaneous liabilities so these funds
are its cheapest source of capital. Consequently, the firm should make
arrangements with its suppliers to use as much of this credit as
possible.
a. True
b. False
(9.3) Spontaneous liabilities F K Answer: a EASY

8. A firm will use spontaneous funds to the extent possible; however, due
to credit terms, contracts with workers, and tax laws there is little
flexibility in their usage.
a. True
b. False
(9.3) Addition to ret. earnings F K Answer: a EASY

9. As long as a firm does not pay out 100% of its earnings, the firm's
annual profit that is retained in the business (i.e., the addition to
retained earnings) is another source of funds for a firm's expansion.
a. True
b. False
(9.3) Asset increase F K Answer: a EASY

10. A rapid build-up of inventories normally requires additional financing,
unless the increase is matched by an equally large decrease in some
other asset.
a. True
b. False
Page 272 True/False Chapter 9: Forecasting

(9.3) Additional funds needed F K Answer: a EASY
11. A firm's AFN must come from external sources. Typical sources include
short-term bank loans, long-term bonds, preferred stock, and common
stock.
a. True
b. False
(9.3) Additional funds needed F K Answer: b EASY

12. If a firm wants to maintain its ratios at their existing levels, then
if it has a positive sales growth rate of any amount, it will require
some amount of external funding.
a. True
b. False
(9.3) Additional funds needed F K Answer: b EASY

13. To determine the amount of additional funds needed (AFN), you may
subtract the expected increase in liabilities, which represents a
source of funds, from the sum of the expected increases in retained
earnings and assets, both of which are uses of funds.
a. True
b. False
(9.3) Capital intensity ratio F K Answer: a EASY

14. The capital intensity ratio is the amount of assets required per dollar
of sales and it has a major impact on a firm's capital requirements.
a. True
b. False
(9.4) Forecasted statements F K Answer: a EASY

15. One of the first steps in arriving at a firm's forecasted financial
statements is a review of industry-average operating ratios relative to
these same ratios for the firm to determine whether changes to the
ratios need to be made.
a. True
b. False
(9.1) Operating plans F K Answer: b MEDIUM

16. Operating plans sketch out broad approaches for realization of the
firm's strategic vision. These plans usually are developed for a
period no longer than a 1-year time horizon because detail is "lost" by
extending out the time horizon by more than 1 year.
a. True
b. False

(9.1) Financial plans F K Answer: a MEDIUM
17. One of the necessary steps in the financial planning process is a
forecast of financial statements under each alternative version of the
operating plan in order to analyze the effects of different operating
procedures on projected profits and financial ratios.
a. True
b. False
(9.3) Additional funds needed F K Answer: a MEDIUM

18. If a firm with a positive net worth is operating its fixed assets at
full capacity, if its dividend payout ratio is 100%, and if it wants to
hold all financial ratios constant, then for any positive growth rate
in sales, it will require external financing.
a. True
b. False
(9.3) Additional funds needed F K Answer: b MEDIUM

19. A firm's profit margin is 5%, its debt/assets ratio is 56%, and its
dividend payout ratio is 40%. If the firm is operating at less than
full capacity, then sales could increase to some extent without the
need for external funds, but if it is operating at full capacity with
respect to all assets, including fixed assets, then any positive growth
in sales will require some external financing.
a. True
b. False
(9.3) Capital intensity ratio F K Answer: b MEDIUM

20. Companies with relatively high assets-to-sales ratios require a
relatively large amount of new assets for any given increase in sales;
hence, they have a greater need for external financing. There are
currently no alternatives for these types of firms to lower their asset
requirements.
a. True
b. False
(9.3) Capital intensity ratio F K Answer: a MEDIUM

21. Firms with high capital intensity ratios have found ways to lower this
ratio permitting them to achieve a given level of growth with fewer
assets and consequently less external capital. For example, just-in-
time inventory systems, multiple shifts for labor, and outsourcing
production are all feasible ways for firms to reduce their capital
intensity ratios.
a. True
b. False
Page 274 True/False Chapter 9: Forecasting

(9.3) Capital intensity ratio F K Answer: a MEDIUM
22. Two firms with identical capital intensity ratios are generating the
same amount of sales. However, Firm A is operating at full capacity,
while Firm B is operating below capacity. If the two firms expect the
same growth in sales during the next period, then Firm A is likely to
need more additional funds than Firm B, other things held constant.
a. True
b. False
(9.3) Capital intensity ratio F K Answer: b MEDIUM

23. If a firm's capital intensity ratio (A0*/S0) decreases as sales
increase, use of the AFN formula is likely to understate the amount of
additional funds required, other things held constant.
a. True
b. False
(9.3) Sustainable growth rate F K Answer: b MEDIUM

24. The minimum growth rate that a firm can achieve with no access to
external capital is called the firm's sustainable growth rate. It can
be calculated by using the AFN equation with AFN equal to zero and
solving for g.
a. True
b. False
(9.4) Financial forecasting F K Answer: b MEDIUM

25. The fact that long-term debt and common stock are raised infrequently
and in large amounts lessens the need for the firm to forecast those
accounts on a continual basis.
a. True
b. False

(9.5) Forecasting when ratios chg. F K Answer: a MEDIUM
26. The AFN equation assumes that the ratios of assets and liabilities to
sales remain constant over time. However, this assumption can be
relaxed when we use the forecasted financial statement method. Three
conditions where constant ratios cannot be assumed are economies of
scale, lumpy assets, and excess capacity.
a. True
b. False
Multiple Choice: Conceptual

(9.1) Strategic planning C K Answer: b EASY
27. Which of the following is NOT a key element in strategic planning as it
is described in the text?
a. The statement of the corporation’s scope.

b. The statement of cash flows.
c. The statement of corporate objectives.
d. The corporation's strategies.
e. The mission statement.
(9.3) AFN equation C K Answer: a EASY

28. Which of the following assumptions is embodied in the AFN equation?
a. Accounts payable and accruals are tied directly to sales.

b. Common stock and long-term debt are tied directly to sales.
c. Fixed assets, but not current assets, are tied directly to sales.
d. Last year’s total assets were not optimal for last year’s sales.
e. None of the firm's ratios will change.
(9.3) Additional funds needed C K Answer: e EASY/MEDIUM

29. 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.
Page 276 Conceptual M/C Chapter 9: Forecasting

(9.3) Additional funds needed C K Answer: a EASY/MEDIUM
30. 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.
(9.3) Capital intensity ratio C K Answer: d EASY/MEDIUM

31. 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.
(9.1) Financial planning C K Answer: d MEDIUM

32. 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.
Chapter 9: Forecasting Conceptual M/C Page 277

(9.3) Spontaneous funds C K Answer: c MEDIUM
33. 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.
e. Assets required per dollar of sales.
(9.3) Additional funds needed C K Answer: a MEDIUM

34. A company expects sales to increase during the coming year, and it is
using the AFN equation to forecast the additional capital that it must
raise. Which of the following conditions would cause the AFN to
increase?
a. The company increases its dividend payout ratio.

b. The company begins to pay employees monthly rather than weekly.
c. The company’s profit margin increases.
d. The company decides to stop taking discounts on purchased materials.
e. The company previously thought its fixed assets were being operated
at full capacity, but now it learns that it actually has excess
capacity.
(Comp.) Forecasting concepts C K Answer: a MEDIUM

35. Which of the following statements is CORRECT?
a. The first, and perhaps the most critical, step in forecasting

financial requirements is to forecast future sales.
b. Forecasted financial statements, as discussed in the text, are used
primarily as a part of the managerial compensation program, where
management’s historical performance is evaluated.
c. The capital intensity ratio gives us an idea of the physical
condition of the firm’s fixed assets.
d. The AFN equation produces more accurate forecasts than the
forecasted financial statement method, especially if fixed assets
are lumpy, economies of scale exist, or if excess capacity exists.
e. Perhaps the most important step when developing forecasted financial
statements is to determine the breakdown of common equity between
common stock and retained earnings.

(9.1) Strategic planning C K Answer: b MEDIUM/HARD
a. A firm’s corporate purpose states the general philosophy of the

business and provides managers with specific operational objectives.
b. 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.
c. A firm’s mission statement defines its lines of business and
geographic area of operations.
d. The corporate scope is a condensed version of the entire set of
strategic plans.
e. 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.
(9.3) Additional funds needed C K Answer: c MEDIUM/HARD

a. 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.
b. If a firm retains all of its earnings, then it cannot require any
additional funds to support sales growth.
c. 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.
d. If a firm has a positive free cash flow, then it must have either a
zero or a negative AFN.
e. 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.
Chapter 9: Forecasting Conceptual M/C Page 279

(9.3) Additional funds needed C K Answer: c MEDIUM/HARD
a. 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.
b. Dividends are paid with cash taken from the accumulated retained
earnings account, hence dividend policy does not affect the AFN
forecast.
c. A negative AFN indicates that retained earnings and spontaneous
liabilities are far more than sufficient to finance the additional
assets needed.
d. If the ratios of assets to sales and spontaneous liabilities to
sales do not remain constant, then the AFN equation will provide
more accurate forecasts than the forecasted financial statements
method.
e. 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.
(9.3) AFN equation C K Answer: e MEDIUM/HARD

a. 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.
b. 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.
c. 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.
d. Dividend policy does not affect the requirement for external funds
based on the AFN equation.
e. 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.

(9.5) Forecasting financial reqs. C K Answer: b MEDIUM/HARD
a. When fixed assets are added in large, discrete units as a company

grows, the assumption of constant ratios is more appropriate than if
assets are relatively small and can be added in small increments as
sales grow.
b. Firms whose fixed assets are “lumpy” frequently have excess
capacity, and this should be accounted for in the financial
forecasting process.
c. For a firm that uses lumpy assets, it is impossible to have small
increases in sales without expanding fixed assets.
d. There are economies of scale in the use of many kinds of assets.
When economies occur the ratios are likely to remain constant over
time as the size of the firm increases. The Economic Ordering
Quantity model for establishing inventory levels demonstrates this
relationship.
e. When we use the AFN equation, we assume that the ratios of assets
and liabilities to sales (A0*/S0 and L0*/S0) vary from year to year in
a stable, predictable manner.
Problems
(9.5) Excess capacity C K Answer: a EASY
41. The Besnier Company had $250 million of sales last year, and it had $75
million of fixed assets that were being operated at 80% of capacity.
In millions, how large could sales have been if the company had
operated at full capacity?
a. $312.5
b. $328.1
c. $344.5
d. $361.8
e. $379.8
(9.5) Excess capacity C K Answer: c MEDIUM

42. Last year Baron Enterprises had $350 million of sales, and it had $270
million of fixed assets that were used at 65% of capacity last year.
In millions, by how much could Baron’s sales increase before it is
required to increase its fixed assets?
a. $170.09
b. $179.04
c. $188.46
d. $197.88
e. $207.78
Chapter 9: Forecasting Problems Page 281

(9.5) Excess capacity C K Answer: e MEDIUM
43. North Construction had $850 million of sales last year, and it had $425
million of fixed assets that were used at only 60% of capacity. What
is the maximum sales growth rate North could achieve before it had to
increase its fixed assets?
a. 54.30%
b. 57.16%
c. 60.17%
d. 63.33%
e. 66.67%
(9.5) Finding target FA/S ratio C K Answer: b MEDIUM

44. Last year National Aeronautics had a FA/Sales ratio of 40%, comprised
of $250 million of sales and $100 million of fixed assets. However,
its fixed assets were used at only 75% of capacity. Now the company is
developing its financial forecast for the coming year. As part of that
process, the company wants to set its target Fixed Assets/Sales ratio
at the level it would have had had it been operating at full capacity.
What target FA/Sales ratio should the company set?
a. 28.5%
b. 30.0%
c. 31.5%
d. 33.1%
e. 34.7%
(9.3) Positive AFN C K Answer: d MEDIUM/HARD

45. Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for
the company’s operations next year, and he wants you to forecast the
firm's additional funds needed (AFN). The firm is operating at full
capacity. Data for use in your forecast are shown below. Based on the
AFN equation, what is the AFN for the coming year? Dollars are in
millions.
Last year’s sales = S0 $350 Last year’s accounts payable $40

Sales growth rate = g 30% Last year’s notes payable $50
Last year’s total assets = A0* $500 Last year’s accruals $30
Last year’s profit margin = PM 5% Target payout ratio 60%
a. $102.8
b. $108.2
c. $113.9
d. $119.9
e. $125.9
Page 282 Problems Chapter 9: Forecasting

(9.3) Negative AFN C K Answer: c MEDIUM/HARD
46. In your internship with Lewis, Lee, & Taylor Inc. you have been asked
to forecast the firm's additional funds needed (AFN) for next year.
The firm is operating at full capacity. Data for use in your forecast
are shown below. Based on the AFN equation, what is the AFN for the
coming year?
Last year’s sales = S0 $200,000 Last year's accounts payable $50,000

Sales growth rate = g 40% Last year's notes payable $15,000
Last year’s total assets = A0* $135,000 Last year's accruals $20,000
Last year’s profit margin = PM 20.0% Target payout ratio 25.0%
a. -$14,440
b. -$15,200
c. -$16,000
d. -$16,800
e. -$17,640
(9.3) AFN--changing div. payout C K Answer: b MEDIUM/HARD

47. You have been asked to forecast the additional funds needed (AFN) for
Houston, Hargrove, & Worthington (HHW), which is planning its operation
for the coming year. The firm is operating at full capacity. Data for
use in the forecast are shown below. However, the CEO is concerned
about the impact of a change in the payout ratio from the 10% that was
used in the past to 50%, which the firm's investment bankers have
recommended. Based on the AFN equation, by how much would the AFN for
the coming year change if HHW increased the payout from 10% to the new
and higher level? All dollars are in millions.
Last year’s sales = S0 $300.0 Last year’s accounts payable $50.0

Sales growth rate = g 40% Last year’s notes payable $15.0
Last year’s total assets = A0* $500.0 Last year’s accruals $20.0
Last year’s profit margin = PM 20.0% Initial payout ratio 10.0%
a. $31.9
b. $33.6
c. $35.3
d. $37.0
e. $38.9
Chapter 9: Forecasting Problems Page 283

(9.5) Finding target FA/S ratio C K Answer: b HARD
48. Weber Interstate Paving Co. had $450 million of sales and $225 million
of fixed assets last year, so its FA/Sales ratio was 50%. However, its
fixed assets were used at only 65% of capacity. If the company had
been able to sell off enough of its fixed assets at book value so that
it was operating at full capacity, with sales held constant at $450
million, how much cash (in millions) would it have generated?
a. $74.81
b. $78.75
c. $82.69
d. $86.82
e. $91.16
Page 284 Problems Chapter 9: Forecasting

CHAPTER 9
ANSWERS AND SOLUTIONS
1. (9.1) Mission statement F K Answer: a EASY
2. (9.1) Corporate strategies F K Answer: b EASY
3. (9.2) Sales forecast F K Answer: a EASY
4. (9.2) Sales forecast F K Answer: a EASY
5. (9.2) Sales forecast F K Answer: b EASY
6. (9.3) Spontaneous liabilities F K Answer: a EASY
7. (9.3) Spontaneous liabilities F K Answer: b EASY
8. (9.3) Spontaneous liabilities F K Answer: a EASY
9. (9.3) Addition to ret. earnings F K Answer: a EASY
10. (9.3) Asset increase F K Answer: a EASY
11. (9.3) Additional funds needed F K Answer: a EASY
12. (9.3) Additional funds needed F K Answer: b EASY
13. (9.3) Additional funds needed F K Answer: b EASY
14. (9.3) Capital intensity ratio F K Answer: a EASY
15. (9.4) Forecasted statements F K Answer: a EASY
16. (9.1) Operating plans F K Answer: b MEDIUM
17. (9.1) Financial plans F K Answer: a MEDIUM
18. (9.3) Additional funds needed F K Answer: a MEDIUM
19. (9.3) Additional funds needed F K Answer: b MEDIUM
20. (9.3) Capital intensity ratio F K Answer: b MEDIUM
21. (9.3) Capital intensity ratio F K Answer: a MEDIUM
22. (9.3) Capital intensity ratio F K Answer: a MEDIUM
23. (9.3) Capital intensity ratio F K Answer: b MEDIUM
24. (9.3) Sustainable growth rate F K Answer: b MEDIUM
Chapter 9: Forecasting Answers Page 285

25. (9.4) Financial forecasting F K Answer: b MEDIUM
26. (9.5) Forecasting when ratios chg. F K Answer: a MEDIUM
27. (9.1) Strategic planning C K Answer: b EASY
28. (9.3) AFN equation C K Answer: a EASY
29. (9.3) Additional funds needed C K Answer: e EASY/MEDIUM
Answer e is obviously correct. A switch to a just-in-time inventory system and outsourcing

production would lower the firm’s capital intensity ratio, which would lower AFN. Note that with
purchase terms of 1/5 net 90, the nominal cost of non-free trade credit is only 4.34%, whereas with
3/15, net 35, the nominal cost of trade credit is over 56%. Therefore, the firm should have been taking
discounts originally, hence should have had few accounts payable, whereas it would probably not take
discounts and thus have more accounts payable with the new supplier. That change would lower its
AFN.
30. (9.3) Additional funds needed C K Answer: a EASY/MEDIUM
31. (9.3) Capital intensity ratio C K Answer: d EASY/MEDIUM
32. (9.1) Financial planning C K Answer: d MEDIUM
33. (9.3) Spontaneous funds C K Answer: c MEDIUM
34. (9.3) Additional funds needed C K Answer: a MEDIUM
35. (Comp.) Forecasting concepts C K Answer: a MEDIUM
36. (9.1) Strategic planning C K Answer: b MEDIUM/HARD
37. (9.3) Additional funds needed C K Answer: c MEDIUM/HARD
38. (9.3) Additional funds needed C K Answer: c MEDIUM/HARD
39. (9.3) AFN equation C K Answer: e MEDIUM/HARD
40. (9.5) Forecasting financial reqs. C K Answer: b MEDIUM/HARD
41. (9.5) Excess capacity C K Answer: a EASY
Sales $250
Fixed assets $75.0
% of capacity utilized 80.0%
Full capacity sales = Actual sales/% of capacity used = $312.5
Page 286 Answers Chapter 9: Forecasting

42. (9.5) Excess capacity C K Answer: c MEDIUM
Sales $350
Fixed assets (not used in calculations) $270
% of capacity utilized 65%
Sales at full capacity = Actual sales/% of capacity used = $538.46
Additional sales without adding FA = Full capacity sales − Actual sales = $188.46
43. (9.5) Excess capacity C K Answer: e MEDIUM
Sales $850
Fixed assets (not used in calculations) $425
Sales at full capacity = Actual sales/% of capacity used = $1,416.67
Additional sales without adding FA = Full capacity sales − Actual sales = $566.67
Percent growth in sales = Additional sales/Old sales = 66.67%
44. (9.5) Finding target FA/S ratio C K Answer: b MEDIUM
Sales $250
Fixed assets $100
Target FA/Sales ratio = Full capacity FA/Sales = FA Capacity sales = 30.0%
45. (9.3) Positive AFN C K Answer: d MEDIUM/HARD
Last year's sales = S0 $350

Sales growth rate = g 30%
Forecasted sales = S0 × (1 + g) $455
ΔS = change in sales = S1 − S0 = S0 × g $105
Last year's total assets = A0* = A0* since full capacity $500
Last year's accounts payable $40
Last year's notes payable. Not spontaneous, so does not enter AFN calculation $50
Last year's accruals $30
L0* = payables + accruals $70
Profit margin = M 5.0%
Target payout ratio 60.0%
AFN = (A0*/S0)ΔS – (L0*/S0)ΔS – Profit margin × S1 × (1 − Payout)

AFN = $150.0 – $21.0 – $9.1 = $119.9
Chapter 9: Forecasting Answers Page 287

46. (9.3) Negative AFN C K Answer: c MEDIUM/HARD
Last year's sales = S0 $200,000

Forecasted sales = S0 × (1 + g) $280,000
ΔS = change in sales = S1 − S0 = S0 × g $80,000
Last year's total assets = A0* = A0* since full capacity $135,000
Last year's accounts payable $50,000
Last year's notes payable. Not spontaneous, so does not enter AFN calculation $15,000
Last year's accruals $20,000
L0* = payables + accruals $70,000
Profit margin = M 20.0%
Target payout ratio 25.0%

AFN = $54,000 – $28,000 – $42,000 = -$16,000
47. (9.3) AFN--changing div. payout C K Answer: b MEDIUM/HARD
Last year's sales = S0 $300

Forecasted sales = S0 × (1 + g) $420
ΔS = change in sales = S1 − S0 = S0 × g $120
Last year's total assets = A0* = A0* since full capacity $500
Last year's accounts payable $50
Last year's notes payable. Not spontaneous, so does not enter AFN calculation $15
Last year's accruals $20
L0* = payables + accruals $70
Profit margin = M 20%
Initial payout ratio 10%
New payout ratio 50%

Old AFN = $200.0 – $28.0 – $75.6 = $96.4
New AFN = $200.0 – $28.0 – $42.0 = $130.0
Change in AFN = $33.6
48. (9.5) Finding target FA/S ratio C K Answer: b HARD
Sales $450
Fixed assets $225
Target FA/Sales ratio = Full capacity FA/Sales = FA/Capacity sales = 32.50%
Optimal FA = Sales × Target FA/Sales ratio = $146.25
Cash generated = Actual FA − Optimal FA = $78.75
Page 288 Answers Chapter 9: Forecasting

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Æquitas non vaga atque incerta est, sed terminos habet atque
limites præfinitas.
Equity is not vague and uncertain, but has determinate
or prescribed boundaries and limits.
Æquitas non vult res novas atque inusitatas inducere.

Equity does not incline to introduce new and unusual
things.
Æquitas nunquam contravenit legi.

Equity never contravenes the law.
Æquitas nunquam liti ancillatur ubi remedium potest dare.

Equity is never the handmaid to strife, where she can
give a remedy.
Æquitas opitulatur ubi pensationi damni locus est.

Equity assists where there is room for the
compensation of a loss.
Æquitas pars legis Angliæ.

Equity (is) part of the English law.
Æquitas rei oppignoratæ redemptionibus favet.

Equity is favourable for the redemption of a thing given
in pawn.
Æquitas rem ipsam intuetur de forma et circumstantiis minus anxia.
Equity considers the matter itself, less anxious about
the form and circumstances.
Æquitas sequitur legem.

Equity follows or attends the law.
Æquitas supervacua odit.

Equity hates superfluous matters.
Æquitas uxoribus, liberis, creditoribus maxime favet.

Equity is favourable to wives, children, and chiefly to
creditors.
Æquitas veritatis filia, bonitatis et justitiæ soror.

Equity is the daughter of truth, and the sister of
goodness and justice.
Æquitas vult domum quod alteri obsit ex causa æque favorabili esse
ac id quod aufert.
Equity wishes that the house which may be injurious to
another should be in the predicament, equally
favourable to that other, as that which it takes from
him.
Æquitas vult omnibus modis ad veritatem pervenire.

Equity wishes by all means to arrive at truth.
Æquitas vult spoliatos, vel deceptos, vel lapsos ante omnia restituti.
Equity wishes the spoiled, the deceived, and the
ruined, above all things to have restitution.
Æstimatio præteriti delicto ex postremo facto nunquam crescit.

An estimation of the past never increases from the
fault last committed.
Affectio tua nomen imponit operi tuo.

Your affection fixes a character upon your service.
Affectus punitur licet non sequatur effectus.

The inclination is punished although the effect may not
follow.
Affirmanti, non neganti, incubit probatio.

The burden of proving rests upon the person affirming,
not upon him denying.
Affirmativum, negativum implicat.

The affirmative implies the existence of the negative.
Agentes et consentientes pari pœna plectentur.

The principals and accessories should suffer the same
punishment.
Alea et ganea res turpissimæ.

The dice and the brothel are infamous things.
Aliud est possidere, aliud esse in possessione.
It is one thing to possess, and another thing to be in
possession.
Aliud est vendere, aliud vendenti consentire.

It is one thing to sell, and another thing to agree to the
persons selling.
Aliquis non debet esse judex in propria causa; quia non potest esse
judex et pars.
One ought not to be judge in his own cause, because
he cannot be a judge and a party.
Allegans contraria non est audiendus.

A person alleging contradictory things ought not to be
heard.
Allegans suam turpitudinem non est audiendus.

A person alleging his own disgrace is not to be heard.
Allegari non debuit quod probatum non relevat.

That ought not to be alleged, which, when tried is
irrelevant.
Alterius circumventio alii non præbet actionem.

The deceiving of one person does not afford an action
to another.
Alternativa petitio non est audienda.

An alternative petition is not to be heard.
Ambigua autem intentio ita accipienda est, ut res salva actori sit.
An ambiguous answer is so to be understood that the
interest of the pleader may be safe.
Ambigua responsio contra proferentem est accipienda.

An ambiguous answer is to be considered as against
the person who gives it.
Ambiguis casibus semper præsumitur pro rege.

In doubtful cases there is always a presumption in
behalf of the king.
Ambiguitas verborum latens verificatione facti tollitur.

The latent ambiguity of words is removed by the
establishment of the fact.
Ambiguitas verborum latens, verificatione suppletur; nam quod ex

facto oritur ambiguum, verificatione facti tollitur.
The latent ambiguity of words is supplied by their
verification; for the ambiguity which arises from the
fact, is taken away by its being verified.
Ambiguitas verborum patens nulla verificatione excluditur.

The evident ambiguity of words is excluded by no
verification.
Ambiguum pactum contra venditorem interpretandum est.

An ambiguous agreement is to be interpreted against
the seller.
Ambiguum placitum interpretari debet contra proferentem.

An ambiguous order is to be interpreted against the
person uttering it.
Angliæ jura in omni casu libertatis dant favorem.

The laws of England in every case give countenance
to liberty.
Animalia fera, si facta sint mansueta, et ex consuetudine eunt et

redeunt, volant et revolant, ut Cervi, Cygni, &c. eousque nostra sunt;
et ita intelliguntur quamdiu habuerunt animum revertendi.
Wild animals, if they have become tame, and go and
return, fly back and fore, and habitually, as stags and
swans, &c. are so far ours, and are so understood to
be, so long as they are inclined to return to us.
Animi notum vultus detegit.

The countenance is the index of the mind.
Animus hominis est anima scripti.

The mind of man is the soul of his writing.
Aperte impossibilia cum dicuntur non faciunt calumniam.

Impossibilities when they are spoken openly, do not
constitute calumny.
Apices juris non sunt jura.
The extreme points of the law are not the laws.
Applicatio est vita regulæ.

Application is the life of rule.
Arbitrio domini res æstimari debet.

Property ought to be valued at the will of the owner.
Argumenta ignota et obscura ad lucem rationis proferunt et reddunt

splendida.
Arguments bring forward to the light of reason,
unknown and obscure facts, and render them clear.
Argumentum a divisione, est fortissimum in jure.

An argument from division is the strongest in the law.
Argumentum a majori ad minus, negativè, non valet; valet e

converso.
An argument from the greater to the less negatively,
has no weight; contrariwise.
Argumentum a simili valet in lege.

An argument from a like case has weight in law.
Argumentum ab authoritate est fortissimum in lege.

An argument drawn from authority is very strong in law.
Argumentum ab impossibili, plurimum valet in lege.
An argument from an impossibility has very great
weight in law.
Argumentum ab inconvenienti est validum in lege; quia lex non

permittit aliquod inconveniens.
An argument from an incongruous thing is not valid in
law, because the law does not allow any thing
incongruous. [See Transcriber’s Note.]
Arma in armatos sumere jura sinunt.

The laws allow to take arms against the armed.
Assignatus utitur jure auctoris.

An assignee enjoys the privilege of his author.
Aucupia verborum sunt judice indigna.

Hunting curiously for words is unworthy of a judge.
Authoritates philosophorum, medicorum, et poetarum, sunt in causis

allegandæ et tenendæ.
The authorities of philosophers, physicians, and poets,
are to be regarded and held in law.
B.
Baratriam committit qui propter pecuniam justitiam baractat.
He commits barratry who barters justice for money.
Benedicta est expositio quando res redimitur a destructione.

It is a blessed exposure when the thing is redeemed
from destruction.
Beneficium non datum nisi propter officium.

A favour is not granted, unless on account of service.
Beneficium non datur nisi officii causa.

A benefice is not granted but for the sake of duty.
Beneficium clericale omnibus patet ubi pœna capitalis statuto

inducitur, nisi ex expresso tollatur.
The benefit of the clergy is open to all, when capital
punishment is inflicted by the statute, unless it be
taken away expressly.
Beneficium principis debet esse mansurum.

The kindness of a prince ought to be permanent.
Benigne faciendæ sunt interpretationes chartarum, ut res magis

valeat quam pereat.
The meaning or interpretation of writs is to be
favourably taken, that the matter may rather succeed
than perish.
Benigne faciendæ sunt interpretationes, ut res magis valeat quam

pereat, et ut voletur repugnantia et supervacua.
Interpretations are to be made favourably, that the
thing may succeed rather than perish; and what is
repugnant and superfluous may be avoided.
Benigne faciendæ sunt interpretationes propter simplicitatem

laicorum, ut res magis valeat quam pereat.
Interpretations are to be favourably given of the
simplicity of the laity, that the affair may rather prosper
than perish.
Benignior sententia in verbis generalibus seu dubiis, est præferenda.

The more favourable opinion in general or doubtful
words is to be preferred.
Benignius leges interpretandæ sunt, quo voluntas earum

conservetur.
The laws are to be more favourably explained that their
will or intention may be preserved.
Bis idem exegi bona fides non patitur; et in satisfactionibus, non

permittitur amplius fieri quam semel factum est.
Honesty does not suffer the same thing to be exacted
twice; and in satisfaction it is not granted that more be
done than hath been once done.
Bona fides non patitur, ut bis idem exigatur.
Honesty does not permit the same thing to be exacted
twice.
Bonæ fidei possessor, in id tantum quod ad se pervenerit, tenetur.

A bona fide possessor is bound only with respect to
that which has come to him.
Boni judicis est ampliare jurisdictionem.

It is the property of a good judge to enlarge his
jurisdiction.
Boni judicis est ampliare justitiam.

It is the property of a good judge to enlarge or extend
justice.
Boni judicis est causas litium dirimere.

It is the property of a good judge to put an end to the
causes of litigation.
Boni judicis est judicium sine dilatione mandare executioni.

It is the property of a good judge to give a mandate for
execution without delay.
Boni judicis est lites dirimere, ne lis ex lite oritur; et interest

reipublicæ ut sint fines litium.
It is the property of a good judge to put an end to law
suits, lest law suit should arise out of law suit; and it is
the interest of the state that there be limits to law suits.
Bonus judex secundum æquum et bonum judicat, et æquitatem
stricto juri præfert.
A good judge decides according to what is just and
good; and prefers equity to strict law.
Bonum defendentis ex integra causa, malum ex quolibet defectu.

Good is the result of a person defending from an entire
cause: evil results from one defending from any defect.
Bonum necessarium extra terminos necessitatis non est bonum.

A necessary good beyond the limits of necessity, is no
good.
C.
Carcer ad homines custodiendos, non ad puniendos, dari debet.
A prison ought to be assigned for keeping men, not for
punishing them.
Carcer non supplicii causa sed custodiæ constitutus.

A prison is ordained not for the sake of punishment,
but for ward.
Casus fortuitus non est sperandus, et nemo tenetur divinare.

A fortuitous case is not to be calculated upon, and
nobody is bound to conjecture what may happen.
Casus omissus pro omisso habendus est.

A case omitted is to be considered as omitted.
Casus omissus et oblivioni datus, depositioni communis juris

relinquitur.
A case omitted and consigned to oblivion is left to the
disposal of common law.
Catella juste possessa amitti non possunt.

A little whelp, (perhaps cattle), lawfully possessed,
cannot be lost. [See Transcriber’s Note.]
Catalla reputantur inter minima in lege.
Chattels are considered as among the least things, in
law.
Causa et origo est materia negotii.

Cause and origin are the subject matters of business.
Causa publica vicarium non recipit.

A public cause does not admit of a substitute.
Causa vaga et incerta, non est causa rationabilis.

A vague and uncertain cause is not a reasonable
cause.
Cautionis in re plus est quam in persona.

There is more security in the thing than in a person.
Caveat emptor; caveat venditor.

Let the purchaser beware—let the seller beware.
Caveat emptor; qui ignorare non debuit quod jus alienum emit.
Let the purchaser take care; who ought not to be
ignorant what right of another he purchases.
Certa debet esse intentio et narratio, et certum fundamentum, et

certa res quæ deducitur in judicium.
The design and narration ought to be certain, and the
foundation certain, and the matter certain, which is
brought into court to be tried.
Certum est quod certum reddi potest.

What can be rendered certain is certain.
Cessa regnare si non vis judicare.

Cease to reign if there be no power to judge.
Cessante causa, cessat effectus.

The cause ceasing, the effect ceases.
Cessante ratione legis, cessat ipsa lex.

The reason of a law discontinuing, the law itself
discontinues.
Charta ejus quæ sub potestate viri sit in lege nulla.

The writing of that woman who is under the power of
her husband has no legal weight—is void in law.
Chirographum apud debitorem repertum præsumitur solutum.

A bill found in the possession of a debtor, is presumed
to be paid.
Certa res oportet in judicium deducatur.

A certain matter is necessary sometimes to be brought
into court for trial.
Clam delinquentes magis puniuntur quam palam.

Clandestine transactions are more severely punished
than those openly committed.
Clausula generalis de residuo non ea complectitur quæ non ejusdem

sint generis cum iis quæ speciatim dicta fuerant.
A general clause of reservation does not comprehend
those things which may not be of the same kind with
those which have been specially expressed.
Clausula generalis non refertur ad expressa.

A general clause does not refer to things mentioned.
Clausula vel dispositio inutilis per præsumptionem remotam vel

causam ex post facto non fulcitur.
An unnecessary clause, or disposition, is not
supported by a remote inference, or an ex post facto
cause.
Clausulæ inconsuetæ semper inducunt suspicionem.

Uncustomary clauses always induce suspicion.
Clerici non ponantur in officio seculari.

The clergy cannot be placed in a secular office.
Collegium seu corpus corporatum nisi regiis constitutionibus non

potest existere.
A college or incorporated body, cannot exist unless by
royal authority.
Commercium jure gentium commune esse debet, et non in
monopolium et privatum paucorum quæstum convertendum.
Commerce by the law of nations ought to be common,
and not to be converted into a monopoly, and the
private gain of a few.
Commodum ex injuria sua nemo habere debet.

Nobody ought to derive advantage from his injurious
behaviour.
Communis error facit jus.

A common error makes law necessary.
Communiter unum officium est excusatio alterius.

One duty commonly is the excuse for the non
performance of another.
Concessio versus concedentem latam interpretationem habere

debeat.
A grant made to another person granting, should have
a wide interpretation.
Condictio dicitur, cum quid in casum incertum, qui potest tendere ad

esse aut non esse, confertur.
The appointment of an action for a certain day, is said
to take place, when any thing in an uncertain case
happens, which may have a tendency to be or not to
be. [See Transcriber’s Note.]
Condictio rei furtivæ, quia rei habet persecutionem, hæredem
quoque furis obligat.
The appointment of an action on a certain day, relating
to stolen goods, as it implies the production of these
stolen goods, binds the heir of the thief also.
Condictio præcedens adimpleri debet priusquam sequatur effectus.

The appointment of an action preceding, ought to take
place before any effect can follow. [See Transcriber’s
Note.]
Condictio ad liberum tenementum auferendum non nisi ex facto

placitari debet.
An argument for taking away a free tenure, ought not
to be pleaded, except from the deed.
Conditio beneficialis quæ statum construit, benigne, secundum

verborum intentionem est interpretanda; odiosa, autem, quæ statum
destruit, stricte, secundum verborum proprietatem, accipienda.
A beneficial agreement which confirms one state, is to
be interpreted favourably, according to the intention of
the words; but an odious agreement, which destroys
one state, is to be understood strictly, according to the
exact meaning of the words.
Conditio ex parte extincta ex toto extinguitur.

An agreement extinguished in part, is wholly
extinguished.
Conditio liberum tenementum cassans non per nuda verba sine

charta valebit.
An agreement making void a free tenement, will have
no weight by bare words without writing.
Conditio neminem juvabit nisi qui pars fuerit aut privus.

An agreement shall avail no one, unless he shall have
been a party, or privy to it.
Conditio partim extincta in omnibus extinguitur.

An agreement extinguished in any of its parts, is
extinguished in them all.
Conditiones præcedentes ad normam legis severe exigendæ; aliter

de subsequentibus ubi æquitati licet damnum rei infectæ pensari.
Preceding agreements must be rigorously exacted
according to the rule of the law; it is otherwise
concerning subsequent agreements, where equity is
allowed to make up for the loss incurred by the failure.
Conditiones præcedentes stricte interpretandæ, sed non ita de

subsequentibus.
Preceding agreements are to be strictly interpreted; but
not so concerning subsequent ones.
Conditiones quælibet odiosæ; maxime autem contra matrimonium et

commercium.
Some agreements are odious, but chiefly those against
matrimony and commerce.
Confessio facta in judicio, omni probatione major est.

Confession made in a trial is stronger than all proof.
Confessus in judicio pro judicato habetur, et quodammodo sua
sententia damnatur.
A person who confesses on trial, is considered as
judged; and in some measure is condemned on his
own admission.
Confirmare nemo potest priusquam jus ei accederit.

Nobody can confirm before the right fall to him.
Confirmare est id quod prius infirmum fuit, firmare vel firmum facere.
To confirm is to strengthen, or make strong, that which
before was weak.
Confirmat usum qui tollit abusum.

He confirms the use who takes away the abuse.
Confirmatio est nulla ubi donum præcedens est invalidum.

There is no confirmation where the preceding gift is
invalid.
Confirmatio est possessionis jure defective per eos quorum jus est
ratihabitio.
The confirmation of a possession defective in law, is a
ratification by means of those whose right it is.
Confirmatio omnes supplet defectus, licet id quod actum est ab initio

non valuit.

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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)

Multiple Choice: True/False

(9.1) Corporate strategies F K Answer: b EASY

(9.2) Sales forecast F K Answer: a EASY

(9.2) Sales forecast F K Answer: a EASY

(9.2) Sales forecast F K Answer: b EASY

Chapter 9: Forecasting True/False Page 271

(9.3) Spontaneous liabilities F K Answer: b EASY

(9.3) Spontaneous liabilities F K Answer: a EASY

(9.3) Addition to ret. earnings F K Answer: a EASY

(9.3) Asset increase F K Answer: a EASY

Page 272 True/False Chapter 9: Forecasting

(9.3) Additional funds needed F K Answer: b EASY

(9.3) Additional funds needed F K Answer: b EASY

(9.3) Capital intensity ratio F K Answer: a EASY

(9.4) Forecasted statements F K Answer: a EASY

(9.1) Operating plans F K Answer: b MEDIUM

Chapter 9: Forecasting True/False Page 273

(9.3) Additional funds needed F K Answer: a MEDIUM

(9.3) Additional funds needed F K Answer: b MEDIUM

(9.3) Capital intensity ratio F K Answer: b MEDIUM

(9.3) Capital intensity ratio F K Answer: a MEDIUM

Page 274 True/False Chapter 9: Forecasting

(9.3) Capital intensity ratio F K Answer: b MEDIUM

(9.3) Sustainable growth rate F K Answer: b MEDIUM

(9.4) Financial forecasting F K Answer: b MEDIUM

Chapter 9: Forecasting True/False Page 275

Multiple Choice: Conceptual

a. The statement of the corporation’s scope.

(9.3) AFN equation C K Answer: a EASY

a. Accounts payable and accruals are tied directly to sales.

(9.3) Additional funds needed C K Answer: e EASY/MEDIUM

a. A switch to a just-in-time inventory system and outsourcing

Page 276 Conceptual M/C Chapter 9: Forecasting

a. Funds that a firm must raise externally from non-spontaneous

(9.3) Capital intensity ratio C K Answer: d EASY/MEDIUM

a. The percentage of liabilities that increase spontaneously as a

(9.1) Financial planning C K Answer: d MEDIUM

a. Monitor operations after implementing the plan to spot any

Chapter 9: Forecasting Conceptual M/C Page 277

a. A forecasting approach in which the forecasted percentage of sales

(9.3) Additional funds needed C K Answer: a MEDIUM

a. The company increases its dividend payout ratio.

(Comp.) Forecasting concepts C K Answer: a MEDIUM

a. The first, and perhaps the most critical, step in forecasting

Page 278 Conceptual M/C Chapter 9: Forecasting

a. A firm’s corporate purpose states the general philosophy of the

(9.3) Additional funds needed C K Answer: c MEDIUM/HARD

a. Suppose a firm is operating its fixed assets at below 100% of

Chapter 9: Forecasting Conceptual M/C Page 279

a. The AFN equation for forecasting funds requirements requires only a

(9.3) AFN equation C K Answer: e MEDIUM/HARD

a. If a firm’s assets are growing at a positive rate, but its retained

AFN = (A0/S0)ΔS – (L0/S0)ΔS – Profit margin × S1 × (1 − Payout)

AFN = (A0/S0)ΔS – (L0/S0)ΔS – Profit margin × S1 × (1 − Payout)

AFN = (A0/S0)ΔS – (L0/S0)ΔS – Profit margin × S1 × (1 − Payout)