Which of the Following Statements Is CORRECT

question 27

Multiple Choice

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.

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Definitions:

Net Present Value

A financial metric that calculates the value of a series of cash flows by discounting them back to the present day, used in capital budgeting to assess the profitability of an investment.

Compound Interest

Interest that is computed not only on the original amount deposited or borrowed but also on the interest that has been added to the principal over past periods.

Capital Investment

Funds invested in a firm or enterprise for the purpose of furthering its business objectives, such as purchasing long-term assets.

Estimated Life

The expected period over which an asset is useful to the owning entity and can generate revenue, used for calculating depreciation.