1. 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)?

Answer

		A switch to a just-in-time inventory system and outsourcing production.
		The company reduces its dividend payout ratio.
		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.
		The company discovers that it has excess capacity in its fixed assets.
		A sharp increase in its forecasted sales.

2. Which of the following statements is CORRECT?

Answer

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

3. Spontaneous funds are generally defined as follows:

Answer

		A forecasting approach in which the forecasted percentage of sales for each item is held constant.
		Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
		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.
		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.
		Assets required per dollar of sales.