Question

Please answer ALL questions

1) Self supporting growth rate represents what the firm can achieve if it had no access to external capital.

True

False

2) Which statement is not true: (Note: all statements assume other things held constant)

	a.	The higher the firm’s spontaneous liabilities,the smaller AFN will be.
	b.	The lower the payout ratio, the smaller AFN will be
	c.	The higher the profit margin, the smaller AFN will be
	d.	The higher the capital intensity ratio, the smaller AFN will be.

3) Select all true statements regarding the results of the AFN model: (Select all that apply)

	a.	If a deficit results, draw on a line of credit.
	b.	If a deficit results, go to the bank and obtain a long term loan.
	c.	If a surplus results, pay out bonuses to management.
	d.	If a surplus results, eliminate it by paying a special dividend.

4) What steps are part of the financial planning process? (select all that apply)

	a.	Forecast financial statements underalternative operating plans.
	b.	Forecast the free cash flows todetermine the estimated intrinsic stockprice.
	c.	Determine amount of financing neededto support the plan.
	d.	Establish a line of credit

Answer 1

1. True. Self supporting growth rate represents what the firm can achieve if it had no access to external capital. The name itself says Self Supporting which means no eaternal support.

2. Option D

The higher the capital intensity ratio, the smaller AFN will be.

Capital intensity ratio = Total assets / Sales

when Capital intensity ratio is higher it means sales or lower or total assets have increased in either way the retained earnings either decrease or stay constant where AFN wont be smaller

3. Option A.

If a deficit results, draw on a line of credit.

If there is a deficit it is better to draw a line of credit on short term from Bank to maintain the AFN

4. Option C Determine amount of financing needed to support the plan. The goal of financial plan is to establish the sources in lowest cost possible to achieve the intended results.