Chapter 4 quiz

Which one of the following correctly defines the retention ratio? a. addition to retained earnings divided by net income b. addition to retained earnings divided by dividends paid c. net income minus additions to retained earinings d. one plus the dividend payout ratio e. net income minus cash dividends

a. addition to retained earnings divided by net income

A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is currently at 40 percent. If the firm has a positive external financing need, that need will be met by: a. long-term debt b. accounts payable c. retained earinings d. fixed assets e. common stock

a. long-term debt

You are getting ready to prepare pro forma statements for your business. Which one of the following are you most apt to estimate first as you begin this process? a. sales forecast b. external financing need c. projected net income d. fixed assets e. current assets

a. sales forecast

When construction a pro forma statement, net working capital generally: a. varies proportionally with sales b. varies only if the firm is currently producing at full capacity c. varies only if the firm is producing at less than full capacity d. varies only if the firm maintains a fixed debt-equity ratio e. remains fixed

a. varies proportionally with sales

Atlas Industries combines the smaller investment proposals from each operational unit into a single project for planning purposes. This process is referred to as which one of the following? a. summation b. aggregation c. conjoining d. appropriation e. conglomeration

b. aggregation

Financial planning: a. is a process that firms undergo once every five years b. considers multiple options and scenarios for the next two to five years c. is a process that firms employ only when major changes to a firm's operations are anticipated d. provides minimal benefits for firms that are highly responsive to economic changes e. focuses solely on the short-term outlook for a firm

b. considers multiple options and scenarios for the next two to five years

The internal growth rate of a firm is best described as the: a. minimum growth rate achievable if the firm maintains a constant equity multiplier b. maximum growth rate achievable excluding external financing of any kind c. minimum growth rate achievable assuming a 100 percent retention ratio d. maximum growth rate achievable with unlimited debt financing e. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio

b. maximum growth rate achievable excluding external financing of any kind

Which one of the following correctly defines the retention ratio? a. net income minus additions to retained earinings b. addition to retained earnings divided by dividends paid c. addition to retained earnings divided by net income d. net income minus cash dividends e. one plus the dividend payout ratio

c. addition to retained earnings divided by net income

The sustainable growth rate of a firm is best described as the: a. maximum growth rate achievable excluding external financing of any kind b. minimum growth rate achievable assuming a 100 percent retention ratio c. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio d. minimum growth rate achievable if the firm maintains a constant equity multiplier e. maximum growth rate achievable with unlimited debt financing

c. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio

Which one of the following terms is applied to the financial planning method which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values? a. sales reconciliation method b. common-size method c. percentage of sales method d. sales dilution method e. trend method

c. percentage of sales method

Phil is working on a financial plan for the next three years. The time period is referred to as which on of the following? a. short-run b. planning agenda c. planning horizon d. current financing period e. financial range

c. planning horizon

Which one of the following is correct in relation to pro forma statements? a. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity b. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity c. The addition to retained earnings is equal to net income plus dividends paid d. Inventory changes are directly proportional to sales changes e. Fixed assets must increase if sales are projected to increase

d. Inventory changes are directly proportional to sales changes

Which one of the following terms is defined as dividends paid expressed as a percentage of net income? a. dividend retention ratio b. dividend section c. dividend portion d. dividend payout ratio e. dividend yield

d. dividend payout ratio

Which one of the following statements concerning financial planning for a firm is correct? a. The financial planning process is based on a single set of economic assumptions b. Financial plans frequently contain conflicting goals c. Financial planning for fixed assets is done on a segregated basis within each division d. Financial plans assume that firms obtain no additional external financing e. Financial planning often contains alternative options based on economic developments

e. Financial planning often contains alternative options based on economic developments

A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume that the firm: a. is projected to grow at the sustainable rate of growth b. is projected to grow at the internal rate of growth c. currently has excess capacity d. retains all of its net income e. is currently operating at full capacity

e. is currently operating at full capacity