FIn ch 4

The financial planning process: I. Involves internal negotiations among divisions. II. Quantifies senior manager's goals. III. Considers only internal factors. IV. Reconciles company activities across divisions. A. III and IV only. B. II and III only. C. I, II, and IV only. D. II, III, and IV only. E. I, II, III, and IV.

C. I, II, and IV only.

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. Net working capital policy. B. Capital structure policy. C. Dividend policy. D. Capital budgeting policy. E. Capacity utilization policy.

C. Dividend policy.

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 constant at 40 percent. If the firm has a positive external financing need, that need will be met by: A. Accounts payable. B. Long-term debt. C. Fixed assets. D. Retained earnings. E. Common stock.

B. Long-term debt.

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

B. Financial plans often contain alternative options based on economic developments.

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. Conjoining B. Aggregation C. Conglomeration D. Appropriation E. Summation

B. Aggregation

40. A Procrustes approach to financial planning is based on: A. A policy of producing a financial plan once every five years. B. Developing a plan around the goals of senior managers. C. A proactive approach to the economic outlook. D. A flexible capital budget. E. A flexible capital structure.

B. Developing a plan around the goals of senior managers.

(Income Statement) Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 (Balance Sheet) Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 If this firm decides to maintain a constant debt-equity ratio, what rate of growth can it maintain, assuming that no additional external equity financing is available. A. 11.16 percent B. 12.27 percent C. 12.56 percent D. 13.27 percent E. 11.82 percent

c. 12.56%

Baked at Home Cookies expects sales of $672,500 next year. The profit margin is 4.6 percent and the firm has a 15 percent dividend payout ratio. What is the projected increase in retained earnings? A. $26,294.75 B. $17,500.50 C. $4,640.25 D. $20,640.25 E. $30,935.00

A. $26,294.75

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 Assume this firm is operating at 88 percent of capacity. All costs and net working capital vary directly with sales. What is the amount of the pro forma net fixed assets for next year if sales are projected to increase by 13 percent? A. $33,600 B. $33,412 C. $38,101 D. $37,968 E. $42,148

A. $33,600

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 Assume net working capital and all of this firm's costs increase directly with sales. Also assume the tax rate and the dividend payout ratios are constant. The firm is currently operating at full capacity. What is the external financing need if sales increase by 4 percent? A. -$1,908 B. -$804 C. -$397 D. $1,201 E. $1,344

A. -$1,908

The most recent financial data for Ocean Movers, Inc. is: Sales $19,700 Costs 15,250 Taxes 1,513 Net income 2,937 Current assets 3,018 Fixed assets 18,282 Current liabilities 2,940 Long-term debt 7,600 Equity 10,760 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. Next year's sales are projected to increase by 7 percent. What is the external financing need if the firm is currently operating at full capacity? A. -$286 B. -$141 C. $583 D. $912 E. $1,285

A. -$286

(Income Statement) Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 (Balance Sheet) Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 This firm is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 5 percent? A. -$323 B. -$467 C. $0 D. $108 E. $367

A. -$323

Urban's, which is currently operating at full capacity, has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 3 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year? A. -$908.50 B. -$722.50 C. $967.30 D. $1,698.00 E. $1,512.00

A. -$908.50

Which one of the following capital intensity ratios indicates the smallest need for fixed assets per dollar of sales? A. .07 B. .86 C. .39 D. 1.00 E. 1.15

A. .07

(Income Statement) For the Year Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 (Balance Sheet) Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 The firm does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm's maximum rate of growth? A. 5.81 percent B. 6.18 percent C. 5.49 percent D. 6.03 percent E. 5.97 percent

A. 5.81 percent

Which one of the following terms is applied to the financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and inc statement account values? A. Percentage of sales method B. Sales dilution method C. Sales reconciliation method D. Common-size method E. Trend method

A. Percentage of sales method

Which one of the following terms can be defined as the net income that a firm reinvests in itself? A. Retention ratio B. Dividend yield C. Dividend payout ratio D. Internal growth rate E. Cash plowback

A. Retention ratio

The external financing need: A. Will limit growth if unfunded. B. Is unaffected by the dividend payout ratio. C. Must be funded by long-term debt. D. Ignores any changes in retained earnings. E. Considers only the required increase in fixed assets.

A. Will limit growth if unfunded.

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 This firm is currently operating at full capacity. The profit margin and the dividend payout ratio are held constant. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 11 percent. What is the external financing needed? A. $896 B. $1,646 C. $972 D. -$145 E. -$768

B. $1,646

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 This firm is currently operating at 88 percent of capacity. The profit margin and the dividend payout ratio are projected to remain constant. Sales are projected to increase by 6 percent next year. What is the projected addition to retained earnings for next year? A. $2,309 B. $2,152 C. $1,890 D. $2,705 E. $3,074

B. $2,152

(Income Statement) Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 (Balance Sheet) Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 Assume this firm is currently operating at 98 percent of capacity and that sales are projected to increase to $35,000. What is the projected addition to fixed assets? A. $0 B. $3,511 C. $2,629 D. $580 E. $1,688

B. $3,511

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 Assume this firm is operating at full capacity. Also assume that all costs, net working capital, and fixed assets vary directly with sales. The debt-equity ratio and the dividend payout ratio are constant. What is the pro forma accounts payable value for next year if sales are projected to increase by 7.5 percent? A. $3,650 B. $3,924 C. $4,121 D. $4,248 E. $4,810

B. $3,924

The most recent financial data for Porter's Corner is: Sales $4,650 Costs 4,160 Net income 490 Assets 5,820 Debt 2,760 Equity 3,060 Assets and costs are proportional to sales. Debt and equity are not. No dividends or taxes are paid. Next year's sales are projected to be $5,487. What is the amount of the external financing needed? A. -$28 B. $469 C. $611 D. $1,048 E. $823

B. $469

(Income Statement) Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 (Balance Sheet) Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 This firm is currently operating at 84 percent of capacity. All costs and net working capital vary directly with sales. The tax rate, the profit margin, and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 12 percent? A. -$810 B. -$912 C. -$642 D. $264 E. $358

B. -$912

Leon's has a total asset turnover of 1.46 percent, a profit margin of 8 percent, an equity multiplier of 1.2, and a dividend payout ratio of 32 percent. What is the sustainable growth rate? A. 10.30 percent B. 10.53 percent C. 10.67 percent D. 10.89 percent E. 11.01 percent

B. 10.53 percent

When planning for the long run, the planning horizon is usually a period of: A. 5 to 10 years. B. 2 to 5 years. C. 1 to 3 years. D. 3 to 7 years. E. 5 years or more.

B. 2 to 5 years.

Basic Motors has a profit margin of 5.6 percent, a total asset turnover of 1.76, a total debt ratio of .2, and a dividend payout ratio of .7. What is the sustainable growth rate? A. 4.68 percent B. 3.84 percent C. 2.12 percent D. 3.49 percent E. 4.41 percent

B. 3.84 percent

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 This firm maintains a constant payout ratio and is currently operating at full capacity. What is the maximum rate at which the firm can grow without acquiring any additional external financing? A. 4.74 percent B. 5.43 percent C. 3.06 percent D. 5.58 percent E. 5.16 percent

B. 5.43 percent

Which one of the following statements is correct? A. Pro forma statements must assume that no new equity is issued. B. Pro forma statements are projections, not guarantees. C. Pro forma statements are limited to a balance sheet and income statement. D. Pro forma financial statements must assume that no dividends will be paid. E. Net working capital needs are excluded from pro forma computations.

B. Pro forma statements are projections, not guarantees.

The plowback ratio is: A. Equal to net income divided by the change in total equity. B. The percentage of net income available to the firm to fund future growth. C. Equal to one minus the retention ratio. D. The change in retained earnings divided by the dividends paid. E. The dollar increase in net income divided by the dollar increase in sales.

B. The percentage of net income available to the firm to fund future growth.

Which one of these is a requirement if the sustainable growth rate is to exceed the internal growth rate? A. Net working capital must be > $0. B. Total debt > $0. C. Dividend ratio = 0. D. Retention ratio = 0. E. Sales > Total assets.

B. Total debt > $0.

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 All of this firm's costs, net working capital, and fixed assets vary directly with sales. Sales are projected to increase by 4.8 percent. What is the pro forma net working capital for next year? A. $15,988 B. $16,684 C. $12,209 D. $17,878 E. $11,800

C. $12,209

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 This firm is expecting sales to decrease by 3 percent next year while the profit margin remains constant. The firm wants to increase the dividend payout ratio by 2.5 percent. What is the projected increase in retained earnings for next year? A. $1,711 B. $1,867 C. $3,334 D. $1,969 E. $3,438

C. $3,334

Wood Refinishers currently has $298,900 in sales and is operating at 86 percent of the firm's capacity. The dividend payout ratio is 40 percent and cost of goods sold is $211,300. What is the full capacity level of sales? A. $245,697.67 B. $208,534.88 C. $347,558.14 D. $211,300.00 E. $254,500.00

C. $347,558.14

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 This firm is currently operating at 93 percent of capacity. What is the full-capacity level of sales? A. $33,666 B. $37,740 C. $38,925 D. $34,141 E. $35,301

C. $38,925

Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income? A. $303.33 B. $327.18 C. $405.60 D. $438.70 E. $441.10

C. $405.60

Seaweed Mfg., Inc. is currently operating at only 86 percent of fixed asset capacity. Fixed assets are $387,000. Current sales are $510,000 and are projected to grow to $664,000. What amount must be spent on new fixed assets to support this growth in sales? A. $0 B. $22,654 C. $46,319 D. $79,408 E. $93,608

C. $46,319

(Income Statement) Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 (Balance Sheet) Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 Assume the profit margin and the payout ratio for this firm are constant. If sales increase by 6 percent, what is the pro forma retained earnings? A. $5,450 B. $5,721 C. $5,531 D. $5,648 E. $5,028

C. $5,531

Rural Market's has $878,000 of sales and $913,000 of total assets. The firm is operating at 93 percent of capacity. What is the capital intensity ratio at full capacity? A. .62 B. .88 C. .97 D. 1.03 E. 1.14

C. .97

The most recent financial information for Ben's Co. is: Sales $19,700 Costs 15,250 Taxes 1,513 Net income 2,937 Current assets 3,018 Fixed assets 18,282 Debt 7,600 Equity 10,760 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. No external equity financing is possible. What is the internal growth rate? A. 12.91 percent B. 13.44 percent C. 10.68 percent D. 14.02 percent E. 14.14 percent

C. 10.68 percent

Fix-It Co. wishes to maintain a growth rate of 9.89 percent a year, a constant debt-equity ratio of .42, and a dividend payout ratio of 40 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve? A. 8.13 percent B. 13.46 percent C. 13.73 percent D. 14.33 percent E. 14.74 percent

C. 13.73 percent

The Dog House has net income of $3,450 and total equity of $8,600. The debt-equity ratio is .60 and the payout ratio is 30 percent. What is the internal growth rate? A. 14.47 percent B. 17.78 percent C. 21.29 percent D. 29.40 percent E. 33.33 percent

C. 21.29 percent

Christina's has a profit margin of 7.5 percent, a capital intensity ratio of .8, a debt-equity ratio of .6, net income of $31,000, and dividends paid of $15,810. What is the sustainable rate of growth? A. 4.94 percent B. 5.29 percent C. 7.93 percent D. 6.42 percent E. 3.58 percent

C. 7.93 percent

A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent. The capital intensity ratio is 1.2 and the debt-equity ratio is .64. What is the profit margin? A. 6.28 percent B. 7.67 percent C. 9.49 percent D. 12.38 percent E. 14.63 percent

C. 9.49 percent

The Outlet has a capital intensity ratio of .87 at full capacity. Currently, total assets are $48,900 and current sales are $53,600. At what level of capacity is the firm currently operating? A. 87.00 percent B. 91.67 percent C. 95.36 percent D. 96.08 percent E. 98.21 percent

C. 95.36 percent

Sales can often increase without increasing which one of the following? A. Accounts receivable. B. Cost of goods sold. C. Accounts payable. D. Fixed assets. E. Inventory.

C. Accounts payable

The sustainable growth rate: A. Assumes there is no external financing of any kind. B. Assumes no additional long-term debt is available. C. Assumes the debt-equity ratio is constant. D. Assumes the debt-equity ratio is 1.0. E. Assumes all income is retained by the firm.

C. Assumes the debt-equity ratio is constant.

Which of the following are needed to determine the amount of fixed assets required to support each dollar of sales? I. Current amount of fixed assets. II. Current sales. III. Current level of operating capacity. IV. Projected growth rate of sales. A. I and III only. B. II and IV only. C. I, II, and III only. D. II, III, and IV only. E. I, II, III, and IV.

C. I, II, and III only.

When utilizing the percentage of sales approach, managers: I. Estimate company sales based on a desired level of net income and the current profit margin. II. Consider only those assets that vary directly with sales. III. Consider the current production capacity level. IV. Can project both net income and net cash flows. A. I and II only. B. II and III only. C. III and IV only. D. I, III, and IV only. E. II, III, and IV only.

C. III and IV only.

Which one of the following will increase the maximum rate of growth a corporation can achieve? A. Avoidance of external equity financing. B. Increase in corporate tax rates. C. Increase in the retention ratio. D. Increase in the dividend payout ratio. E. increase in sales forecast.

C. Increase in the retention ratio.

Buster's Market has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its debt at this time. The firm is profitable. Which one of the following defines the maximum rate at which this firm can currently grow? A. Internal growth rate (1 - .30). B. Sustainable growth rate (1 - .30). C. Internal growth rate. D. Sustainable growth rate. E. Zero percent.

C. Internal growth rate.

The financial planning process tends to place the least emphasis on which one of the following? A. Growth limitations. B. Capacity utilization. C. Market value of a firm . D. Capital structure of a firm. E. Dividend policy.

C. Market value of a firm .

The internal growth rate of a firm is best described as A. Minimum growth rate achievable assuming a 100 percent retention ratio. B. Minimum growth rate achievable if the firm maintains a constant equity multiplier. C. Maximum growth rate achievable excluding external financing of any kind. D. Maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. Maximum growth rate achievable with unlimited debt financing.

C. Maximum growth rate achievable excluding external financing of any kind

37. Financial plans generally tend to ignore which one of the following? A. Dividend policy. B. Manager's goals and objectives. C. Risks associated with cash flows. D. Operating capacity levels. E. Capital structure policy.

C. Risks associated with cash flows.

Which one of the following is correct in relation to pro forma statements? A. Fixed assets must increase if sales are projected to increase. B. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. C. The addition to retained earnings is equal to net income less cash dividends. D. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity. E. Inventory changes are not proportional to sales changes.

C. The addition to retained earnings is equal to net income less cash dividends.

A firm's net working capital and all of its expenses vary directly with sales. The firm is operating currently at 96 percent of capacity. The firm wants no additional external financing of any kind. The tax rate is 34 percent and the dividend payout ratio is fixed at 25 percent. Which one of the following statements related to the firm's pro forma statements for next year must be correct? A. Total equity will remain constant at this year's ending value. B. The maximum rate of sales increase is 4percent. C. The firm cannot exceed its internal rate of growth. D. Accounts payable will increase at the same rate as fixed assets. E. Inventory will remain constant at the current level.

C. The firm cannot exceed its internal rate of growth.

Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year? A. The pro forma profit margin is equal to the current profit margin. B. Retained earnings will increase at the same rate as sales. C. Total assets will increase at the same rate as sales. D. Long-term debt will increase in direct relation to sales. E. Owners' equity will remain constant.

C. Total assets will increase at the same rate as sales

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. Need for additional fixed assets. B. Current fixed costs. C. Projected sales. D. Desired net income. E. Desired dividend payments.

C. projected sales

The most recent financial statements for RPJ Co. are shown here: Sales $19,700 Costs 15,250 Taxes 1,513 Net income 2,937 Current assets 3,018 Fixed assets 18,282 Current liabilities 2,940 Long-term debt 7,600 Equity 10,760 Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued? A. $2,151 B. $3,211 C. $5,804 D. $3,858 E. $5,667

D. $3,858

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 The profit margin, the debt-equity ratio, and the dividend payout ratio for this firm are constant. Sales are expected to increase by $5,000 next year. What is the projected addition to retained earnings for next year? A. $3,575 B. $1,885 C. $1,909 D. $3,994 E. $2,386

D. $3,994

Robotics desires a sustainable growth rate of 9.5 percent while maintaining a 30 percent dividend payout ratio and a 12 percent profit margin. The company has a capital intensity ratio of .95. What equity multiplier is required to achieve the company's desired rate of growth? A. .84 B. .98 C. 1.02 D. 1.19 E. 1.11

D. 1.19

The Two Sisters has a 9 percent return on assets and a 75 percent dividend payout ratio. What is the internal growth rate? A. 3.24 percent B. 4.05 percent C. 3.97 percent D. 2.30 percent E. 2.25 percent

D. 2.30 percent

The Parodies Corp. has a 22 percent return on equity and a 23 percent payout ratio. What is its sustainable growth rate? A. 18.68 percent B. 19.25 percent C. 19.49 percent D. 20.39 percent E. 22.00 percent

D. 20.39 percent

Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current sales of $611,000. How much can the firm grow before any new fixed assets are needed? A. 4.99 percent. B. 5.78 percent. C. 6.02 percent. D. 6.38 percent. E. 6.79 percent.

D. 6.38 percent.

(Income Statement) Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 (Balance Sheet) Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 What was the retention ratio? A. 33 percent B. 40 percent C. 50 percent D. 60 percent E. 67 percent

D. 60%

Which one of the following ratios identifies the amount of total assets a firm needs in order to generate $1 in sales? A. Return on assets B. Equity multiplier C. Retention ratio D. Capital intensity ratio E. Fixed asset turnover ratio

D. Capital intensity ratio

28. A firm's external financing need is financed by which of the following? A. Retained earnings. B. Net working capital and retained earnings. C. Net income and retained earnings. D. Debt or equity. E. Owners' equity, including retained earnings.

D. Debt or equity.

All else constant, which one of the following will increase the internal rate of growth? A. Decrease in the retention ratio. B. Decrease in net income. C. Increase in the dividend payout ratio. D. Decrease in total assets. E. Increase in cost of goods sold.

D. Decrease in total assets.

A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of the following account values when compiling pro forma statements? A. Sales. B. Cost of goods sold. C. Accounts receivable. D. Fixed assets. E. Long-term debt.

D. Fixed assets.

Blasco Industries is currently at full-capacity sales. Which one of the following is limiting sales to this level? A. Net working capital. B. Long-term debt. C. Inventory. D. Fixed assets. E. Debt-equity ratio.

D. Fixed assets.

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 internal rate of growth. B. Is projected to grow at the sustainable rate of growth. C. Currently has excess capacity. D. Is currently operating at full capacity. E. Retains all of its net income.

D. Is currently operating at full capacity.

The sustainable growth rate of a firm is best described as the: A. Minimum growth rate achievable assuming a 100 percent retention ratio. B. Minimum growth rate achievable if the firm maintains a constant equity multiplier. C. Maximum growth rate achievable excluding external financing of any kind. D. Maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. Maximum growth rate achievable with unlimited debt financing.

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

If a firm equates its pro forma sales growth to the rate of sustainable growth and has positive net income and excess capacity, then the: A. Maximum capacity level will have to increase at the same rate as sales growth. B. Total assets will have to increase at the same rate as sales growth. C. Debt-equity ratio will increase. D. Retained earnings will increase. E. Number of common shares outstanding will increase.

D. Retained earnings will increase.

You are comparing the current financial statements of a firm to the pro forma statement for next year. The pro forma is based on a 4 percent increase in sales. The firm is currently operating at 85 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, which one of the following statements must be true? A. Projected dividends equal the current cash dividend amount. B. Depreciation will decrease by 4 percent. C. Retained earnings will increase by 85 percent of projected net income. D. Total assets will increase by less than 4 percent. E. Total liabilities and owners' equity will increase by 4 percent.

D. Total assets will increase by less than 4 percent.

Financial planning: A. Focuses solely on the short-term outlook for a firm. B. Is a process that firms employ only when major changes to a firm's operations are anticipated. C. Is a process that firms undergo once every five years. D. Considers multiple options and scenarios. E. Provides minimal benefits for firms that are highly responsive to economic changes.

D. considers multiple options and scenarios

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 What are the pro forma retained earnings for next year if this firm grows at a rate of 3.6 percent and both the profit margin and the dividend payout ratio remain constant? A. $3704 B. $3771 C. $3592 D. $15921 E. $15854

E. $15,854

Ed's Market is operating at full capacity with a sales level of $547,200 and fixed assets of $471,000. The profit margin is 5.4 percent. What is the required addition to fixed assets if sales are to increase by 4 percent? A. $10,709 B. $14,680 C. $22,400 D. $16,760 E. $18,840

E. $18,840

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 Assume this firm is operating at full capacity. Also assume that assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. What is the external financing need if sales increase by 14 percent? A. -$1,816 B. -$1,268 C. $1,031 D. $3,504 E. $2,260

E. $2,260

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 This firm is currently operating at 96 percent of capacity. What is the required increase in fixed assets if sales are projected to increase by 14 percent? A. $4,205 B. $3,400 C. $6,833 D. $0 E. $2,605

E. $2,605

The Atlantic Co. has sales of $21,600, total costs of $16,780 and taxes of $1,750. The dividend payout ratio is 12 percent. Sales are expected to increase by 22 percent next year. What is the pro forma addition to retained earnings assuming all costs vary proportionately with sales? A. $2,899 B. $3,745 C. $3,892 D. $2,011 E. $3,296

E. $3,296

Cross Town Express has sales of $137,000, net income of $14,000, total assets of $98,000, and total equity of $45,000. The firm paid $7,560 in dividends and maintains a constant dividend payout ratio. Currently, the firm is operating at full capacity. All costs and assets vary directly with sales. The firm does not want to obtain any additional external equity. At the sustainable rate of growth, how much new total debt must the firm acquire? A. $0 B. $6,311 C. $6,989 D. $7,207 E. $8,852

E. $8,852

The most recent financial information for Last in Line is: Sales $9,800 Costs 8,740 Net income 1,060 Assets 8,950 Debt 4,760 Equity 4,190 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $371 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $10,584. What is the amount of the external financing need? A. $716 B. $1,333 C. -$1,574 D. -$382 E. -$28

E. -$28

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 This firm is currently operating at 84 percent of capacity. What is the capital intensity ratio at full capacity? A. 1.09 B. 1.04 C. .96 D. .84 E. .91

E. .91

A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10 percent. What must the debt-equity ratio be if the firm wishes to keep these ratios constant? A. .05 B. .40 C. .55 D. .60 E. .95

E. .95

Which one of these is a correct method of computing the retention ratio? A. 1 - Plowback ratio . B. Change in retained earnings / Cash dividends. C. 1 + Dividend payout ratio. D. (Change in retained earnings + Cash dividends) / Net income. E. 1 - (Cash dividends / Net income).

E. 1 - (Cash dividends / Net income).

A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent. The current profit margin is 7 percent and the firm uses no external financing sources. What must the total asset turnover rate be? A. 0.87 times B. 0.90 times C. 1.01 times D. 1.15 times E. 1.86 times

E. 1.86 times

Country Comfort, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $63,000 and dividends were $44,500. What is the sustainable growth rate? A. 10.3 percent B. 10.7 percent C. 11.6 percent D. 12.7 percent E. 12.3 percent

E. 12.3 percent

Seaweed Mfg., Inc. is currently operating at only 84 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed? A. 17.23 percent B. 17.47 percent C. 18.03 percent D. 18.87 percent E. 19.05 percent

E. 19.05 percent

The Soccer Shoppe has a 9 percent return on assets and a 25 percent payout ratio. What is its internal growth rate? A. 4.72 percent B. 5.08 percent C. 5.49 percent D. 6.23 percent E. 7.24 percent

E. 7.24 percent

(Income Statement) Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 (Balance Sheet) Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 What is the internal growth rate for this firm assuming the payout ratio remains constant? A. 6.70 percent B. 6.87percent C. 7.31 percent D. 7.49 percent E. 7.89 percent

E. 7.89 percent

Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing. The firm maintains a constant debt-equity ratio of .55, a total asset turnover ratio of 1.30, and a profit margin of 9 percent. What must the dividend payout ratio be? A. 26.26 percent B. 38.87 percent C. 49.29 percent D. 61.13 percent E. 73.74 percent

E. 73.74 percent

Bill's has a 5 percent profit margin and a dividend payout ratio of 20 percent. The total asset turnover is 1.6 and the debt-equity ratio is .4. What is the sustainable rate of growth? A. 11.20 percent. B. 9.60 percent. C. 10.89 percent. D. 9.26 percent. E. 9.84 percent.

E. 9.84 percent.

Financial planning accomplishes which of the following for a firm? I. Determination of asset requirements. II. Development of contingency plans. III. Establishment of priorities. IV. Analysis of funding options. A. I and III only. B. II and IV only. C. I, III, and IV only. D. I, II, and III only. E. I, II, III, and IV.

E. I, II, III, and IV.

Which of the following can affect a firm's sustainable rate of growth? I. Capital intensity ratio. II. Profit margin. III. Dividend policy. IV. Debt-equity ratio. A. III only. B. I and III only. C. II, III, and IV only. D. I, II, and IV only. E. I, II, III, and IV.

E. I, II, III, and IV.

Which of the following questions are appropriate to address during the financial planning process? I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced? A. I, II, and III only. B. I, II, and IV only. C. I, III, and IV only. D. II, III, and IV only. E. I, II, III, and IV.

E. I, II, III, and IV.

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only. B. II and III only. C. I, III, and IV only. D. II, III, and IV only. E. I, II, III, and IV.

E. I, II, III, and IV.

When constructing a pro forma statement, net working capital generally: A. Remains fixed. B. Varies only if the firm is currently producing at full capacity. C. Varies only if the firm maintains a fixed debt-equity ratio. D. Varies only if the firm is producing at less than full capacity. E. Varies proportionally with sales.

E. Varies proportionally with sales.