Multiple Choice Questions Financial Management CH4

True or false: The financial planning process will not change from firm to firm. a) True b) False

b) False

True or false: Financial planning addresses all the basic elements of firm value. a) true b) false

b) false Reason: Firm value is determined by cash flow, risk, and timing. Financial planning uses accounting numbers, and none of the three elements is addressed.

The _____ ratio is equal to 1 minus the dividend payout ratio. a) receipt b) cash turnover c) dividend d) plowback

d) plowback

Another name for the plowback ratio is the __________ ratio.

retention

The main advantage of the percentage of __________ approach is that it is a quick and practical way of generating pro forma statements.

sales

The percentage of ___________ approach is a financial planning method in which accounts are varied depending on a firm's predicted sales level.

sales

Alpha Omega's percentage of sales model forecasts sales growth of 20 percent next year. If cost of good sold are proportionate at 80 percent of sales, then cost of good sold will increase by: a) 20 percent. b) 16 percent. c) 60 percent. d) 80 percent.

a) 20 percent.

In a financial plan using the percentage of sales approach, why is it assumed that assets increase with sales? a) Additional working capital and fixed assets are needed to support growth b) Increased profits increase retained earnings thereby increasing equity c) Additional profits are generated d) Funds must be borrowed to support sales

a) Additional working capital and fixed assets are needed to support growth

In a financial plan, how is the amount of borrowing determined? a) By management b) In direct proportion to sales growth c) By the increase in total assets minus the increase in cash d) By the needed increase in fixed assets

a) By management

Based on ROE and the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth? a) Financial policy b) Dividend policy c) Profit margin d) Current stock price

a) Financial policy b) Dividend policy c) Profit margin

True or false: Given external financing needs in a financial plan, the firm must borrow both long- and short-term funds. a) True b) False

b) False

True or false: All other things staying the same, the lower the rate of growth in sales or assets, the greater will be the need for external financing. a) True b) False

b) False Reason: All other things staying the same, the higher the rate of growth in sales or assets, the greater will be the need for external financing.

Which of the following are common elements of a financial planning model? a) Government approval b) Sales forecast c) Economic assumptions d) Elasticity of demand estimates e) Pro forma statements

b) Sales forecast c) Economic assumptions e) Pro forma statements

All else equal, a decrease in a firm's sustainable rate of growth will result from a(n) ____________ (decrease/increase) in the dividend payout ratio.

increase

All else equal, a(n) ___________ (decrease/increase) in the debt-equity ratio will increase ROE, and therefore sustainable growth.

increase

All else equal, a(n) ___________ (decrease/increase) in the total asset turnover will increase ROE, and therefore sustainable growth. Listen to the complete question

increase

An increase in the profit margin, all else equal, will (decrease/increase) ROE.

increase

It is typically assumed that total assets ____________(increase/decrease) with increased sales because additional working capital and fixed assets are needed to support growth.

increase

The ___________ growth rate tells us the maximum growth rate that can be achieved with no external financing of any kind.

internal

Growth, by itself, ________(is/isn't) a good financial goal.

isn't

One of the main things financial __________ accomplishes is to force managers to think about goals and establish priorities.

planning or plans

The ____________ growth rate is the maximum rate of growth a firm can maintain without increasing its financial leverage.

sustainable

Alpha Omega's percentage of sales model forecasts sales growth of 20 percent next year. If cost of good sold are proportionate at 80 percent of sales, then cost of good sold will increase by: 16 percent. 60 percent. 80 percent. 20 percent.

20 percent.

The alternative sustainable growth rate formula, growth equals ROE times b, is correct only when total equity is taken from the _____. a) beginning of period balance sheet b) beginning of period income statement c) end of period balance sheet d) end of period income statement

a) beginning of period balance sheet

Given an internal growth rate of 3 percent, a firm can: a) grow by 3 percent or less without any additional external financing. b) not grow. c) grow by more than 3 percent without any additional external financing. d) repay all of its outstanding debt.

a) grow by 3 percent or less without any additional external financing.

All other things staying the same, a high growth firm will have a relatively ______ need for external financing than a low growth firm. a) higher b) indecisive c) lower

a) higher

Capital budgeting refers to _____. a) how a firm chooses which investment opportunities to take b) the degree of financial leverage a firm chooses to employ c) the amount of cash a firm thinks is necessary and appropriate to pay shareholders

a) how a firm chooses which investment opportunities to take

An increase in the profit margin will ______ a firm's sustainable growth rate. a) increase b) not change c) decrease

a) increase

The aggregation process determines the total _____. a) needed investment b) sustainable growth c) debt requirement d) planning horizon

a) needed investment

Given a firm requires external financing, the firm has multiple options including short- and long-term borrowing, and _____. a) new equity b) spontaneous dividends c) depreciation d) capital regression

a) new equity

Growth, by itself, is: a) not an appropriate goal b) an appropriate goal c) a sufficient goal d) an overriding goal

a) not an appropriate goal

When using pro forma statements, the financial statements are the form we use to summarize the different events _____. a) projected for the future b) historically experienced c) in the inflation-adjusted environment d) in the balance sheet from last year

a) projected for the future

The smaller investment proposals of each operational unit are added up, and the sum is treated as one big project, which is called ________.

aggregation

Assume Zoe Corporation's plant capacity will allow for sales of $250 million and last year's sales were $180 million. Zoe's current gross plant and equipment total is $340 million. You project sales growth of 20% in the upcoming year.What total should you forecast for Zoe's plant and equipment on your pro forma balance sheet? a) $216 million b) $340 million c) $192 million d) $408 million

b) $340 million Reason: With $216 million in sales (180 X 1.2), Zoe is not at plant capacity, so it will not need to increase its plant and equipment amount to accommodate its new level of sales.

Which of the following are likely to be accomplished with financial planning? a) Perfect forecasts b) Avoiding surprises c) Exploring options d) Outcome certainty

b) Avoiding surprises c) Exploring options

The text quotes conventional business wisdom as saying that financial plans don't work, but financial planning does. What does that mean? a) Financial plans work well, but are difficult to create. b) Because financial plans are forecasts, they seldom happen as foreseen, but they allow managers to examine goals and prioritize. c) Because financial plans are forecasts, they seldom happen as foreseen, but they make the job of the financial manager easier. d) Because financial plans are forecasts, they seldom happen as foreseen, but they allow the firm to practically run itself.

b) Because financial plans are forecasts, they seldom happen as foreseen, but they allow managers to examine goals and prioritize.

What does it mean if a company's capital intensity ratio is 2.4? a) The firm generates $2.40 in sales for every $1 invested in assets. b) The firm requires $2.40 in assets to generate $1 in sales. c) The firm needs $2.40 in equity to generate $1 in sales. d) The shareholders earn $2.40 in profit for every $1 invested in assets.

b) The firm requires $2.40 in assets to generate $1 in sales.

A financial planning model can be used to test the feasibility of a planned growth rate because it incorporates which of the following? a) The choice of long-term or short-term debt b) The firm's use of financial leverage c) The asset turnover rate d) The firm's dividend policy

b) The firm's use of financial leverage c) The asset turnover rate d) The firm's dividend policy

When constructing a pro forma income statement, the first step is to supply: a) a plug figure b) a sales figure c) an economic forecast d) asset requirements

b) a sales figure

One advantage to well-executed financial planning is that the firm can _____. a) correct past mistakes b) avoid surprises c) be sure of final outcomes of investments d) get ahead of the competition

b) avoid surprises

A commonly cited reason for financial failure is a lack of _____. a) tax relief b) effective long-range planning c) marketing savvy d) good relations with investors

b) effective long-range planning

A financial plan looks at what needs to be done in the _____. a) past b) future c) present

b) future

An increase in a firm's total asset turnover will ______ the sustainable growth rate. Multiple choice question. a) destabilize b) increase c) decrease

b) increase

If a firm increases its debt-equity ratio it will _____ its sustainable rate of growth. a) not affect b) increase c) decrease

b) increase

The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with ____ and those that do not. a) expenses b) sales c) increases in retained earnings d) assets

b) sales

The alternative sustainable growth rate formula, where growth is equal to ROE times b, should only be applied when using total equity from the __________(end/beginning) of period balance sheet.

beginning

Weston's financial planning model shows assets are projected to increase by $2.7 million while liabilities and equity increase by $1.5 million. What is the external financing need (EFN)? a) $1.5 million b) $4.2 million c) $1.2 million d) $2.2 million

c) $1.2 million Reason: $2.7m - 1.5m = $1.2m

A pro forma balance sheet indicates that total assets will increase by $300,000. If a debt-equity ratio of 0.5 is maintained, then debt must increase by: Multiple choice question. a) $150,000. b) $200,000. c) $100,000. d) $300,000.

c) $100,000. Reason: If D/E = 0.5, an increase of $300k in assets will be financed with $100k of debt and $200k of equity.

Dot's financial planning model shows assets are projected to increase by $800,000 but liabilities and equity increase by $395,000. What is the external financing need (EFN)? a) $800,000 b) $1,195,000 c) $405,000 d) $305,000 e) $395,000

c) $405,000 Reason: $800,000 - 395,000 = $405,000

Which one of these will decrease a firm's sustainable rate of growth? a) An increase in the profit margin b) An increase in the asset turnover ratio c) An increase in the dividend payout ratio d) An increase in the plowback ratio

c) An increase in the dividend payout ratio

Which of the following are often left out of most financial planning models? a) Profit margins, financial leverage, and turnover b) Equity growth, cash flow, and financial leverage c) Cash flow size, risk, and timing d) Sales growth, asset growth, and equity growth

c) Cash flow size, risk, and timing

The sustainable growth rate can be used to _____. a) determine the optimal debt-equity ratio b) evaluate company risk c) assess planned growth d) determine company value

c) assess planned growth

The amount of long-term borrowing is something set by management, and it _____. a) always varies directly with sales b) remains flat during periods of high growth c) does not necessarily relate directly to the level of sales d) is impossible to predict

c) does not necessarily relate directly to the level of sales

The main advantage of the percentage of sales approach to producing pro forma statements is _____. a) it results in longer planning periods b) estimates require more assumptions than with other methods c) ease and practicality d) estimates for all accounts can be accurately determined as a percentage of sales

c) ease and practicality

The primary benefit of financial planning is that it _____. a) ensures the firm will never run out of money b) helps managers determine who to fire and who to promote c) ensures internal consistency among the firm's various goals

c) ensures internal consistency among the firm's various goals

Across firms, the financial planning process _____. a) always follows the same steps b) is basically the same for each firm c) is different for each firm

c) is different for each firm

Galting Corporation is operating at 80% of capacity. This means that the current sales level is: a) 20% of the full capacity sales level b) maximized c) less than the industry average d) 80% of the full capacity sales level

d) 80% of the full capacity sales level

Which one of these will decrease a firm's sustainable rate of growth? a) An increase in the asset turnover ratio b) An increase in the plowback ratio c) An increase in the profit margin d) An increase in the dividend payout ratio

d) An increase in the dividend payout ratio

Which of the following is true about the sustainable growth rate? a) It is the minimum rate of growth a firm can maintain without increasing its financial leverage b) It is the maximum rate of growth a firm can maintain while increasing its financial leverage c) It is the minimum rate of growth a firm can maintain while increasing its financial leverage d) It is the maximum rate of growth a firm can maintain without increasing its financial leverage

d) It is the maximum rate of growth a firm can maintain without increasing its financial leverage

The ratio of total assets to sales is known as the _____. a) equity multiplier b) sales turnover ratio c) asset turnover ratio d) capital intensity ratio

d) capital intensity ratio

The ____ ratio equals the cash dividend divided by the net income. a) distributed retained earnings b) dividend multiplier c) cash turnover d) dividend payout

d) dividend payout

The amount of cash the firm pays out to shareholders is the firms: a) capital budgeting decision b) net working capital decision c) capital structure d) dividend policy

d) dividend policy

A lack of effective long-range planning is commonly cited as a reason for _____. a) financial prosperity b) inflation c) negative interest yields d) financial distress

d) financial distress

Financial planning is a(n) _____ process. a) static b) inert c) one-time d) iterative

d) iterative

The ________ payout ratio is equal to the cash ________ divided by the net income.

dividend; dividend

Pro __________ statements are one of the key elements of financial planning.

forma