FINANCE CHAPTER 9

10%

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and the retention rate = 50%. a. 10% b. 15% c. 20% d. 25% e. 30%

30%

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%. a. 10% b. 16% c. 20% d. 24% e. 30%

early-maturity stage

During which life cycle stage is a venture typically most accurate in forecasting sales? a. rapid growth stage b. startup stage c. development stage d. early-maturity stage e. survival stage

seasoned financing

During which round of financing is a venture typically most accurate in forecasting sales? a. seasoned financing b. mezzanine financing c. first round financing d. startup financing e. seed financing

net income

Internally generated funds which are available for distribution to owners of for reinvestment back into the business to support future growth can be characterized by which of the following? a. operating income b. operating cash flow c. net income d. net cash flow e. pre-tax income

1.00

Determine a firm's "financial policy" multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2 times. a. 1.00 b. 1.25 c. 1.50 d. 1.75 e. 2.00

20.0%

Determine a firm's "return on assets" percentage based on the following information: sustainable growth rate = 20%; total assets $500,000; beginning of year common equity $200,000; and dividend payout percentage = 60%. a. 10.0% b. 12.5% c. 15.0% d. 17.5% e. 20.0%

true

The "constant-ratio forecasting method" is a variant of the "percent-of-sales forecasting method.

false

The added costs associated with obtaining equity capital are based on investor expected rates of return and are explicit costs which affect AFN.

false

The constant ratio forecasting method makes projections based on the assumption that certain costs and some balance sheet items are best expressed as a percentage of sales.

true

The cost of obtaining additional funds, such as additional interest expenses from borrowing funds, may be explicit and impact AFN.

financial capital needed

The financial funds needed to acquire assets necessary to support a firm's sales growth is called: a. spontaneously generated funds b. additional funds needed c. addition in retained earnings d. financial capital needed

additional funds needed

The financial funds still needed to finance asset growth after using spontaneously generated funds and any increase in retained earnings is called: a. spontaneously generated funds b. additional funds needed c. addition in retained earnings d. financial capital needed

spontaneously generated funds

The increase in accounts payables and accruals that occur with a sales increase is called: a. spontaneously generated funds b. additional funds needed c. addition in retained earnings d. financial capital needed

false

The percent of sales forecasting method must project all cost and balance sheet items at the same growth rate as sales.

true

The rate at which a firm can grow sales based on the retention of business profits is known as sustainable sales growth rate.

false

The sustainable sales growth rate is equal to ROA times the retention ratio.

false

The volatility of a firm's cash balance will steadily decreases as the firm progresses from the survival stage to the rapid-growth stage.

true

The weighted average of a set of possible outcomes or scenarios is known as expected values.

17.5%

If a venture has a return on assets (ROA) = 10%, an equity multiplier based on beginning equity = 3.5 times, and a retention rate = 50%, the sustainable growth rate would be: a. 10% b. 17.5% c. 35% d. 40% e. 20.5%

16%

If a venture has a return on assets (ROA) = 10%, an equity multiplier based on beginning equity = 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be: a. 10% b. 16% c. 20% d. 24% e. 40%

50%

If a venture has a return on assets (ROA) = 12%, an equity multiplier based on beginning equity = 3.0 times, and a sustainable growth rate of 18%, the retention rate would be: a. 10% b. 20% c. 30% d. 40% e. 50%

50%

If beginning of period common equity is $200,000 and end of period common equity is $300,000, the sustainable growth rate is: a. 33% b. 40% c. 50% d. 67% e. 75%

a weighted average of a set of scenarios or possible outcomes

An "expected value" is: a. a simple average of a set of scenarios or possible outcomes b. a weighted average of a set of scenarios or possible outcomes c. the highest scenario value or outcome d. the lowest scenario value or outcome

true

An increase in accounts receivable will require additional financing unless the increase is offset by an equal decrease in another asset account.

true

In a typical venture's life cycle, the rapid-growth stage involves creating and building value, obtaining additional financing, and examining exit opportunities.

false

Increases in accounts payable and notes payable are examples of spontaneously generated funds.

true

Increases in accounts receivable and accounts payable that accompany sales increases are called "spontaneously generated funds".

true

"Additional funds needed" (AFN) is the gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings.

true

"Financial capital needed" (FCN) is the amount of funds needed to acquire assets necessary to support a firm's sales growth.

false

"First-round financing" usually occurs during a venture's rapid-growth life cycle stage.

false

"Internally generated funds" is the cash produced from operating a firm over a specified time period.

false

"Public or seasoned financing" typically occurs during the survival stage of a venture's life cycle.

false

"Spontaneously generated funds" are increases in accounts receivable and accounts payable that accompany sales increases.

true

Forecasting for firms with operating histories is generally much easier than forecasting for early-stage ventures.

forecasting industry sales and expressing the venture's sales as a percent of industry sales

A "new" venture usually begins its sales forecast by first: a. forecasting industry sales and expressing the venture's sales as a percent of industry sales b. using a "bottom-up" market-driven approach c. extrapolating past sales d. working with existing and potential customers

true

A complete balance sheet and income statement mechanically imply a working statement of cash flows.

false

A customer-driven or "bottom-up" approach to forecasting sales is used primarily to forecast industry sales growth rates.

15%

A firm has net income of $320,000 on sales of $3,200,000. Its assets total $2,000,000; the equity at the beginning of the year was $1,600,000 and dividends paid were $80,000. What is the sustainable growth rate? a. 5% b. 15% c. 6.25% d. 4.69% e. none of the above

18.75%

A firm projects net income to be $500,000, intends to pay out $125,000 in dividends, and had $2 million of equity at the beginning of the year. The firm's sustainable growth rate is: a. 5% b. 18.75% c. 6.25% d. 4.69% e. none of the above

false

A firm with a positive growth rate in sales will require some additional funds, assuming the existing ratios will not be changed.

true

A firm's maximum sustainable sales growth rate occurs at a retention ratio of 100%.

sustainable sales growth rate

A sales growth rate based on the retention of profits is referred to as the: a. real sales growth rate b. sustainable sales growth rate c. spontaneous sales growth rate d. nominal sales growth rate e. weighted average sales growth rate

25%

A venture's common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate? a. 5% b. 10% c. 15% d. 20% e. 25%

20%

A venture's common equity was $50,000 at the end of last year. If the venture's common equity at the end of this year was $60,000, what was its sustainable sales growth rate? a. 5% b. 10% c. 15% d. 20% e. 25%

49%

Lola is in the process of forecasting the sales growth rate for an early-stage venture specializing in the production of durable running shoes. Lola predicts a .2 probability of an 80% growth in sales, a .3 probability of a 60% growth in sales, a .4 probability of a 40% growth in sales, and a .1 probability of a 10% decrease in sales. What is the expected sales growth rate of the venture? a. 47% b. 49% c. 51% d. 53%

false

Long-term financial planning begins with a forecast of annual working capital needs.

true

Preparing a projected statement of cash flows serves as check on the projected income statement and projected balance sheet.

early-maturity stage

Public or seasoned financing is generally associated with which one of the following life cycle stages: a. development stage b. startup stage c. survival stage d. rapid-growth stage e. early-maturity stage

false

Sales forecasting accuracy is usually highest during a venture's startup stage in its life cycle.

true

Sales forecasting accuracy is usually lowest during a venture's development stage in its life cycle.

true

Sales forecasts usually are based on either a single specific scenario or weighted averages of several possible realizations.

an increasing dividend payout rate

Which one of the following would increase a firm's need for additional funds? a. an increasing profit margin b. a decreasing expected sales growth rate c. an increase in accruals d. an increasing dividend payout rate e. a decrease in assets

10%

Use the following information to estimate a venture's sustainable growth rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25%. a. 50% b. 25% c. 20% d. 10% e. 5%

checking

When long-term financial planning efforts set cash as a percentage of sales or as a fixed dollar amount for planning purposes, the projected cash flow statement is said to be a ________ forecasting statement. a. dynamic b. passive c. conservative d. checking

forecast sales, project the income statement

When projecting financial statements, one would first , and then proceed to: a. project of the balance sheet, forecast sales. b. forecast sales, project the income statement c. forecast sales, project the balance sheet d. forecast sales, project the statement of cash flows

true

When using the beginning of period equity base, the sustainable sales growth rate is equal to ROE times the retention ratio.

percent-of-sales method

Which of the following is a forecasting method used to project financial statements? a. percent-of-sales method b. percent-of-expenses method c. GNP-ratio method d. a and b e. a, b, and c

consider the effects of changes in the firm's debt/equity blend on the sales forecasts.

Which of the following is not a step in forecasting sales for a seasoned firm? a. forecast future growth rates based on possible scenarios and the probabilities of those scenarios. b. attempt to corroborate the projected sales growth rates analyzing both industry growth rates and the firm's own past market share. c. refine the sales forecast by using the sales force as a direct contact with both existing and potential customers. d. take into consideration the likely impact of major operating changes within the firm on the sales forecast. e. consider the effects of changes in the firm's debt/equity blend on the sales forecasts.

forecast tax rates

Which of the following is not part of the financial forecasting process used to project financial statements? a. forecast sales b. forecast tax rates c. project the income statement d. project the balance sheet e. project the statement of cash flows

forecasting is relatively unimportant for early-stage ventures with little historical financial data

Which of the following statements is incorrect? a. forecasting sales is the first step in creating projected financial statements b. financial forecasting tends to be more accurate for mature ventures than for early-stage ventures c. forecasting is relatively unimportant for early-stage ventures with little historical financial data d. a and b e. a and c

start-up

Which one of the following life cycle stages would generally be associated with the second lowest sales forecasting accuracy? a. early-maturity b. rapid-growth c. survival d. start-up e. development

retention rate

Which one of the following ratios is not part of the "standard" return on equity (ROE) model? a. net profit margin b. asset turnover c. equity multiplier d. retention rate

$840,000

Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm's AFN? a. $200,000 b. $600,000 c. $840,000 d. $960,000 e. $1,400,000