1 Which of the following statements is CORRECT?

A) When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A*/S and L*/S) vary from year to year in a stable, predictable manner.

B) 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.

C) Firms whose fixed assets are lumpy frequently have excess capacity, and this should be accounted for in the financial forecasting process.

D) For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.

E) 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.

2 Last year Godinho Corp. had $250 million of sales, 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

3. Which of the following is NOT one of the steps taken in the financial planning process?

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.

Monitor operations after implementing the plan to spot any deviations and then take corrective actions.

Determine the amount of capital that will be needed to support the plan.

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.

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

4 Which of the following statements is CORRECT?

Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.

The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.

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.

The capital intensity ratio gives us an idea of the physical condition of the firm s fixed assets.

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.

5 Last year Handorf Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?Answer

54.30%

57.16%

60.17%

63.33%

66.67%

6 Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be $10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm s value of operations, in millions?Answer

$158

$167

$175

$184

$193

7 Based on the corporate valuation model, the value of a company s operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock s price per share?Answer

$23.00

$25.56

$28.40

$31.24

$34.36

8 Based on the corporate valuation model, the value of a company s operations is $1,200 million. The company s balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock s price per share?Answer

$24.90

$27.67

$30.43

$33.48

$36.82

9 Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half year adjustments).

Year: 1 2

Free cash flow: $50 $100Answer

$1,456

$1,529

$1,606

$1,686

$1,770

10 Suppose Leonard, Nixon, & Shull Corporation s projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company s weighted average cost of capital is 11%, what is the value of its operations?Answer

$1,714,750

$1,805,000

$1,900,000

$2,000,000

$2,100,000

11 A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions?

Year: 1 2 3

Free cash flow: $15 $10 $40

a 315

b 331

c 348

d 367

e 386

12 Based on the corporate valuation model, Hunsader s value of operations is $300 million. The balance sheet shows $20 million of short term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock s price per share?

a 13.72

b 14.44

c 15.2

d 16.00

e 16.8