Define each of the following terms:
a. Pro forma (projected) financial statements
b. Additional funds needed (AFN); AFN equation
c. Capital intensity ratio
d. Spontaneously generated funds; retention ratio
e. Excess capacity adjustments
f. Regression analysis for forecasting
g. Use of ratios in forecasting
ST-2 Growth rate Weatherford Industries Inc. has the following ratios: A*/S0 1.6; L*/S0
0.4; profit margin 0.10; and retention ratio 0.55, or 55 percent. Sales last year were
$100 million. Assuming that these ratios will remain constant, use the AFN equation to
determine the maximum growth rate can achieve without having to employ
nonspontaneous external funds.
ST-3 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 could reduce inventories and thus raise its turnover to 4
without affecting sales, the profit margin, or the other asset turnover ratios. Under these
conditions, use the AFN equation to determine the amount of additional funds Weather-
ford would require next year if sales grow by 20 percent
