HMG6477 Homework 4

The retention rate can be expressed as: The dividend payout ratio minus 1 1 minus the dividend payout ratio Net income minus dividends 1 plus the dividend payout ratio

1 minus the dividend payout ratio

Last year, a company had $20 million in profits and a dividend payout ratio of 50%. The company's total shareholders' equity at the end of the year was $110 million. The company sold no new equity last year. What was the company's return on beginning-of-period equity for last year? 18.18% 20.00% 22.22% 50.00%

20.00%

Which of the following are strategies that a firm can use when its actual growth rate in sales exceeds the sustainable growth rate in sales? Assume the firm has longer-term sustainable growth problems. Increase prices Increase the dividend payout rate Issue new equity Reduce financial leverage Outsource some or all of production

Increase prices Issue new equity Outsource some or all of production

Click and drag elements in order

Startup Growth Maturity Decline

Outsourcing increases asset turnover.

True

If a firm's actual sales growth rate exceeds its sustainable growth rate Blank______, however, if its actual sales growth rate is lower than its sustainable growth rate, Blank______. it will produce a cash surplus; it will produce a cash deficit it will produce a cash deficit; it will have to reduce its leverage it will have to issue new stock; it will be able to repurchase stock from investors it will produce a cash deficit; it will produce a cash surplus

it will produce a cash deficit; it will produce a cash surplus

A firm's sustainable growth rate is: the maximum rate at which the company's sales can increase without having to develop new products or services. the maximum rate at which the company's sales can increase without depleting financial resources equal to the average of the firm's sales growth rate over the most recent ten-year period the rate at which management aims to increase sales each year

the maximum rate at which the company's sales can increase without depleting financial resources

If a firm's dividend payout rate is equal to 20%, what is the firm's retention rate? 10% 80% 0% 500%

80%

Which of the following are options to address a sustainable growth rate in excess of the actual growth rate? Accumulate cash within the firm Acquire a growing firm Sell new equity Increase the dividend payout ratio

Accumulate cash within the firm Acquire a growing firm Increase the dividend payout ratio

Suppose a firm's annual net income is equal to $200 million. If the firm pays out dividends of $60 million during the year, what is the firm's retention rate (R) for the year? 70% 0% 30% 333%

70%

Which of the following is not an assumption implicit in the calculation of the sustainable growth rate? The company has a target capital structure it wishes to maintain. The company has a target dividend policy it wishes to maintain. Management is unable or unwilling to sell new equity. Future growth will be similar to past growth.

Future growth will be similar to past growth

A firm with actual growth exceeding sustainable growth can alleviate this imbalance by reducing prices.

False

A important goal of management is to ensure that the company's actual growth rate equals its sustainable growth rate.

False

Selling new equity is a simple remedy available to all firms with financing deficits.

False

The sustainable growth rate is defined as the maximum rate at which sales can increase without acquiring new fixed assets or hiring new employees.

False

Which of the following statements are true? If a firm grows more rapidly than its sustainable growth rate, it will generate cash deficits. If a firm grows more rapidly than its sustainable growth rate, it will generate cash surpluses. If a firm grows more slowly than its sustainable growth rate, it will generate cash deficits. If a firm grows more slowly than its sustainable growth rate, it will generate cash surpluses.

If a firm grows more rapidly than its sustainable growth rate, it will generate cash deficits. If a firm grows more slowly than its sustainable growth rate, it will generate cash surpluses.

Which of the following is not a way a firm can increase its sustainable growth rate? Increase the retention rate Increase the dividend payout ratio Increase the profit margin Increase leverage

Increase the dividend payout ratio

Which of the following is not a way a firm can increase its sustainable growth rate? Increase the profit margin Introduce a new product or service Increase asset turnover Increase leverage

Introduce a new product or service

Which of the following are ways in which a firm can increase shareholders' equity? Issue new stock Retain profits Take out a bank loan Pay dividends

Issue new stock Retain profits

A firm's sustainable growth rate can be expressed as the firm's: retention ratio times the firm's return on end-of-period equity. retention ratio times the firm's return on beginning-of-period equity. dividend payout ratio times the firm's return on end-of-period equity. dividend payout ratio ratio times the firm's return on beginning-of-period equity.

retention ratio times the firm's return on beginning-of-period equity.

Profitable pruning typically refers to the practice of: selling a division of a multi-segment firm to generate additional cash. eliminating dividends until the company has become profitable. increasing gross profit margins by increasing price or reducing cost of goods sold. eliminating debt.

selling a division of a multi-segment firm to generate additional cash.

For the year, a firm's sales were $90,000, EBIT was $60,000, net income was $25,000, and dividends were $10,000. The firm had $200,000 in total equity at the beginning of the year. What was the firm's return on beginning-of-period equity for the year? 11.63% 12.50% 27.78% 40.00%

12.50%

Last year, a company had a profit margin of 15%, a return on beginning-of-period equity of 25%, and a dividend payout ratio of 20%. What was the company's sustainable growth rate last year? 3% 5% 12% 20%

20%

How can increasing the price of a firm's products help a firm whose actual sales growth exceeds its sustainable growth rate? Raising prices will increase the firm's leverage, which will increase its sustainable growth rate. An increase in price will reduce sales volume, which will reduce the amount of financing required to produce products. Raising prices will allow the firm to pay out more in dividends. An increase in price will increase sales volume, which will generate more cash to be used in the business.

An increase in price will reduce sales volume, which will reduce the amount of financing required to produce products.

The sustainable growth rate can be expressed as the product of which of the following? Asset turnover Leverage (assets/beginning-of-period equity) Retention rate Profit margin

Asset turnover Leverage (assets/beginning-of-period equity) Retention rate Profit margin

How can outsourcing help a firm whose actual sales growth exceeds its sustainable growth rate? By increasing the firm's leverage through an increased use of debt By reducing a firm's long-term dividend payout ratio By eliminating the assets needed to perform the outsourced activity By reducing the firm's actual sales growth rate

By eliminating the assets needed to perform the outsourced activity

How can profitable pruning in a single-product company help a firm whose actual sales growth exceeds its sustainable growth rate? By reducing sales By reducing the retention rate By reducing the dividend payout rate By freeing up cash

By reducing sales By freeing up cash

How can a firm increase equity without issuing additional stock? There is no way to increase equity without issuing additional stock. By issuing publicly traded debt. By reinvesting earnings back into the firm. By increasing the dividend payout rate.

By reinvesting earnings back into the firm

Increasing which of the following will not increase a firm's return on equity? Asset turnover Assets-to-Equity Ratio Current Ratio Profit Margin

Current Ratio

Which of the following strategies would not help alleviate the problem of an actual growth rate in excess of the sustainable growth rate? Merge with a cash cow Prune away marginal activities Decrease prices Sell new equity

Decrease prices

In a multi-segment firm, how does profitable pruning benefit a firm whose actual sales growth exceeds its sustainable growth rate? It reduces sales growth by eliminating the sales associated with the discarded division. It generates cash directly by selling a division of the firm. It increases the amount of dividends that a firm is required to pay. It reduces the amount of dividends that a firm is required to pay.

It reduces sales growth by eliminating the sales associated with the discarded division. It generates cash directly by selling a division of the firm.

Which of the following describes how differences between actual and sustainable growth should be managed? Management should keep the actual growth rate as close to the sustainable growth rate as possible. Management should only be concerned when actual growth falls below sustainable growth. Management should only be concerned when actual growth rises above sustainable growth. Management should anticipate disparities between actual and sustainable growth and have a strategy for dealing with the disparity.

Management should anticipate disparities between actual and sustainable growth and have a strategy for dealing with the disparity.

Which of the following describe two ways in which profitable pruning can help alleviate cash deficits in a multi-segment firm?

Selling a business generates cash directly and reduces future sales growth.

Which of the following describe two ways in which profitable pruning can help alleviate cash deficits in a multi-segment firm? Selling a business decreases future sales growth and reduces the dividend payout ratio. Selling a business generates cash directly and reduces the dividend payout ratio. Selling a business generates cash directly and increases future sales growth. Selling a business generates cash directly and reduces future sales growth.

Selling a business generates cash directly and reduces future sales growth.

Which of the following are assumptions made in the calculation of the sustainable growth rate? The company will not hire new employees. The company will maintain a set capital structure. The company will maintain a set dividend policy. The company will not sell new equity.

The company will maintain a set capital structure. The company will maintain a set dividend policy. The company will not sell new equity.

A firm's retention rate can be defined as: -The amount of earnings not paid out as dividends -The fraction of earnings paid out as dividends -The percentage of sales accruing to the firm as profits -The fraction of earnings retained in the company

The fraction of earnings retained in the company

Which of the following is not a problem associated with issuing new equity? New shareholders are typically minority shareholders who cannot influence strategy. The returns from an equity investment are typically lower than a bond investment. Capital markets may be nonexistent in some countries. It is difficult to attract venture capital, without which it is difficult to issue new equity.

The returns from an equity investment are typically lower than a bond investment.

Profitable pruning refers to the practice of selling off marginal operations to generate cash for remaining businesses

True

In a single-product company, profitable pruning refers to the practice of: selling a division of the firm to generate additional cash. increasing net profit margins through more efficient operations. eliminating dividends until the company has become profitable. eliminating slow-paying customers or slow-turning inventory.

eliminating slow-paying customers or slow-turning inventory.

Which of the following is not a phase in the life cycle of a successful firm going-public phase decline phase startup phase growth phase maturity phase

going-public phase