526 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management
KEY TERMS Define each of the following terms:
a. Mission statement; corporate scope; statement of corporate objectives; corporate
strategies
b. Operating plan; financial plan
c. Spontaneously generated funds
d. Additional Funds Needed (AFN); AFN equation
e. Capital intensity ratio; sustainable growth rate
f. Forecasted financial statements; retention ratio
g. Excess capacity adjustments
h. Regression analysis
SUSTAINABLE GROWTH RATE Weatherford Industries Inc. has the following ratios: A 0 */S 0 "
1.6; L 0 */S 0 " 0.4; profit margin " 0.10; and retention ratio " 0.55, or 55%. Sales last year were
$100 million. Assuming that these ratios will remain constant, use the AFN equation to
determine the maximum growth rate (the sustainable growth rate) Weatherford can achieve
without having to employ nonspontaneous external funds.
ADDITIONAL FUNDS NEEDED Suppose Weatherford’s financial consultants report
(1) that the inventory turnover ratio is Sales/Inventory " 3 times versus an industry
average of 4 times and (2) that Weatherford can reduce inventories and thus raise its
turnover to 4 without affecting sales, the profit margin, or the other asset turnover ratios.
Under those conditions, use the AFN equation to determine the amount of additional
funds Weatherford will require next year if sales grow by 20%.What are the key factors on which external financing depends, as indicated in the AFN
equation?
Assume that an average firm in the office supply business has a 6% profit margin, a 40%
debt/assets ratio, a total assets turnover of 2 times, and a dividend payout ratio of 40%. Is
it true that if such a firm is to have any sales growth (g & 0), it will be forced to borrow or
to sell common stock (that is, it will need some nonspontaneous external capital even if g
is very small)?
Would you agree that computerized corporate planning models were a fad during the
1990s but that because of a need for flexibility in corporate planning, they are no longer
used by most firms?
Certain liability and net worth items generally increase spontaneously with increases in
sales. Put a check mark (!) next to those items that typically increase spontaneously.Accounts payable
Notes payable to banks
Accrued wages
Accrued taxes
Mortgage bonds
Common stock
Retained earningsSuppose a firm makes the following policy changes. If the change means that external
nonspontaneous financial requirements (AFN) will increase, indicate this with a (!),