FIN 534 RANK Change The World /fin534rank.com FIN 534 RANK Change The World /fin534rank.com | Page 124

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FIN 534 Week 7 Chapter 12 Solution
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1. Which of the following statements is CORRECT?
a. Perhaps the most important step when developing forecasted financial
statements is to determine the breakdown of common equity between
common stock and retained earnings.
b. The first, and perhaps the most critical, step in forecasting financial
requirements is to forecast future sales.
c. 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.
d. The capital intensity ratio gives us an idea of the physical condition of
the firm’s fixed assets.
e. 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.
2. Which of the following statements is CORRECT?
a. The sustainable growth rate is the maximum achievable growth rate
without the firm having to raise external funds. In other words, it is the
growth rate at which the firm's AFN equals zero.