FM14e-TB-CHAPTER 12 CORPORATE VALUATION AND FINANCIAL PLANNING
1. As a firm's sales grow, its current assets also tend to increase. For instance, as
... [Show More] sales
increase, the firm's inventories generally increase, and purchases of inventories result in more accounts
payable. Thus, spontaneous liabilities that reduce AFN arise from transactions brought on by sales
increases.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-6 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Spontaneous liabilities KEY: Bloom’s: Knowledge
2. Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest
source of capital. Consequently, the firm should make arrangements with its suppliers to use as much
of this credit as possible.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-6 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Spontaneous liabilities KEY: Bloom’s: Knowledge
3. A firm will use spontaneous funds to the extent possible; however, due to credit terms,
contracts with workers, and tax laws there is little flexibility in their usage.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-6 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Spontaneous liabilities KEY: Bloom’s: Knowledge
4. As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is
retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's
expansion.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-6 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Addition to ret. earnings KEY: Bloom’s: Knowledge
5. A rapid build-up of inventories normally requires additional financing, unless the
increase is matched by an equally large decrease in some other asset.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-6 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Asset increase KEY: Bloom’s: Knowledge
6. A firm's AFN must come from external sources. Typical sources include short-term
bank loans, long-term bonds, preferred stock, and common stock.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-6 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows [Show Less]