EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 16, Problem 2P
Summary Introduction
To determine: Company B’s
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Which of the following statements are false? Select all that apply
a.
Liquidity ratios are used to measure the speed with which various accounts are converted into sales.
b.
When ratios of different years are being compared, inflation should be taken into consideration
c.
Return on total assets (ROA) is sometimes called return on investment
d.
Generally, inventory is concerned with the most liquid asset that a firm possesses.
e.
A P/E ratio of 20 indicates that investors are willing to pay $20 for each $1 of earnings.
Which of the following statements is correct?
a. Any forecast of financial requirements involves determining how much money the firm will need and is obtained by adding together increases in assets and spontaneous liabilities and subtracting operating income.
b. The percentage of sales method of forecasting financial needs requires only a forecast of the firm's balance sheet. Although a forecasted income statement helps clarify the need, it is not essential to the percentage of sales method.
c. Because dividends are paid after taxes from retained earnings, dividends are not included in the percentage of sales method of forecasting.
d. Financing feedbacks describe the fact that interest must be paid on the debt used to help finance AFN and dividends must be paid on the shares issued to raise the equity part of the AFN. These payments would lower the net income and retained earnings shown in the projected financial statements.
e. All of the statements above are false.
The AFN equation and the financial statement–forecasting approach both assume that assets grow at relatively the same rate as sales. However, the relationship between assets and sales is often a little more difficult than that. In particular, some firms use regression analysis to predict the required assets needed to support a given level of sales.
Leeding Engines Ltd. has used its historical sales and asset data to estimate the following regression equations:
Accounts Receivable
=
–$94,555 + 0.249(Sales)
Inventories
=
$9,900 + 0.180(Sales)
Leeding Engines Ltd. currently has sales of $1,230,000, but it expects sales to grow by 15% over the next year. Use the regression models to calculate Leeding Engines Ltd.’s forecasted values for accounts receivable and inventories needed to support next year’s sales.
Forecasted Values for Next Year
Accounts receivable
Inventories
Based on the next year’s accounts receivable and inventory levels…
Chapter 16 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 16 - Prob. 1QTDCh. 16 - Prob. 2QTDCh. 16 - Prob. 3QTDCh. 16 - Prob. 4QTDCh. 16 - Prob. 5QTDCh. 16 - Prob. 6QTDCh. 16 - Prob. 7QTDCh. 16 - Prob. 8QTDCh. 16 - Prob. 9QTDCh. 16 - Prob. 10QTD
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