Chapter 4
In a financial plan using the percentage of sales approach, why is it assumed that assets increase with sales? Multiple choice question. Additional working capital and fixed assets are needed to support growth Increased profits increase retained earnings thereby increasing equity Additional profits are generated Funds must be borrowed to support sales
Additional working capital and fixed assets are needed to support growth
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. $200,000. $100,000. $150,000. $300,000.
$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.
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.
Blank 1: increase
Cross Corporation has Net Income of $4,095. Their retention ratio is 65%. How much will they payout in dividends this year? Multiple Choice $1,000 $1,433 $2,033 $2,662 $4,000
$1,433 Dividend = Net Income x ( 1 - retention ratio ) = 4095 x (1 - 0.65 ) = 1433
Galting Corporation is operating at 80% of capacity. This means that the current sales level is: Multiple choice question. 80% of the full capacity sales level less than the industry average 20% of the full capacity sales level maximized
80% of the full capacity sales level Reason: Galting Corporation is operating at 80% of capacity. This means that the current sales level is 80% of the full capacity sales level.
Select all that apply Which of the following are common elements of a financial planning model? Multiple select question. Elasticity of demand estimates Government approval Economic assumptions Pro forma statements Sales forecast
Economic assumptions Pro forma statements Sales forecast
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. True false question.TrueFalse
False
The financial planning process will not change from firm to firm. True false question.TrueFalse
False
Financial planning addresses all the basic elements of firm value. True false question.TrueFalse
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.
Given external financing needs in a financial plan, the firm must borrow both long- and short-term funds. True false question.TrueFalse
False Reason: The financing decision is separate from the financial plan.
Which of the following is true about the sustainable growth rate? Multiple choice question. It is the minimum rate of growth a firm can maintain without increasing its financial leverage It is the minimum rate of growth a firm can maintain while increasing its financial leverage It is the maximum rate of growth a firm can maintain while increasing its financial leverage It is the maximum rate of growth a firm can maintain without increasing its financial leverage
It is the maximum rate of growth a firm can maintain without increasing its financial leverage
Growth can summarize various aspects of a firm's __________ and ___________ policies. Multiple Choice Legal, expansion Marketing, investment Profitability, expansion Financial, investment Goals, marketing
Financial, investment
All other things staying the same, a high growth firm will have a relatively ______ need for external financing than a low growth firm. Multiple choice question. higher indecisive lower
higher
An increase in the profit margin will ______ a firm's sustainable growth rate. Multiple choice question. increase decrease not change
increase Reason: An increase in the profit margin, all else equal, will increase ROE, and therefore sustainable growth
The___________ growth rate tells us the maximum growth rate that can be achieved with no external financing of any kind.
internal
Across firms, the financial planning process _____. Multiple choice question. is basically the same for each firm always follows the same steps is different for each firm
is different for each firm
Financial planning is a(n) _____ process. Multiple choice question. static inert one-time iterative
iterative
Given a firm requires external financing, the firm has multiple options including short- and long-term borrowing, and _____. Multiple choice question. capital regression new equity spontaneous dividends depreciation
new equity
Growth, by itself, is: Multiple choice question. a sufficient goal an overriding goal an appropriate goal not an appropriate goal
not an appropriate goal increasing the market value of the owner's equity
The aggregation process determines the total _____. Multiple choice question. debt requirement sustainable growth planning horizon needed investment
needed investment
For the most recent fiscal year, the Hammock Company's total assets were $850 and net income was equal to $97. Of the $97 net income, $44 was retained. What is the internal growth rate for the Hammock Company? Multiple Choice 3.46% 5.46% 6.46% 8.12% 9.12%
5.46%
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. Multiple choice question. increases in retained earnings expenses sales assets
sales Reason: The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with sales and those that do not.
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? Multiple choice question. $408 million $216 million $192 million $340 million
$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.
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)? Multiple choice question. $305,000 $405,000 $1,195,000 $395,000 $800,000
$405,000 Reason: EFN = $800,000 - $395,000 = $405,000
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)? Multiple choice question. $4.2 million $1.2 million $2.2 million $1.5 million
1.2 million Reason: $2.7m - 1.5m = $1.2m
For the most recent fiscal year, the Hammock Company's total equity was $450 and net income was equal to $97. Of the $97 net income, $44 was retained. What is the sustainable growth rate for the Ladder Company? Multiple Choice 5.12% 8.83% 10.08% 10.83% 12.14%
10.83%
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:
20 percent. correct Reason: In a percentage of sales model, expenses that are proportionate will grow at the same rate as sales.
Which one of these will decrease a firm's sustainable rate of growth? Multiple choice question. An increase in the profit margin An increase in the asset turnover ratio An increase in the plowback ratio An increase in the dividend payout ratio
An increase in the dividend payout ratio
Select all that apply Which of the following are likely to be accomplished with financial planning? Multiple select question. Perfect forecasts Outcome certainty Avoiding surprises Exploring options
Avoiding surprises Exploring options
The smaller investment proposals of each operational unit are added up, and the sum is treated as one big project, which is called ______ .
Blank 1: aggregation
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.
Blank 1: beginning
Pro _________ statements are one of the key elements of financial planning.
Blank 1: forma
An increase in the profit margin, all else equal, will (decrease/increase) ROE.
Blank 1: 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.
Blank 1: increase
Growth, by itself, (is/isn't) a good financial goal.
Blank 1: isn't or is not
The percentage ____________ of approach is a financial planning method in which accounts are varied depending on a firm's predicted sales level.
Blank 1: sales
The ___________growth rate is the maximum rate of growth a firm can maintain without increasing its financial leverage.
Blank 1: sustainable
Which of the following are often left out of most financial planning models? Multiple choice question. Cash flow size, risk, and timing Profit margins, financial leverage, and turnover Equity growth, cash flow, and financial leverage Sales growth, asset growth, and equity growth
Cash flow size, risk, and timing
Garner Corporation has total liabilities of $1,750 and equity of $4,450. Sales are $3,300. What is the Capital Intensity Ratio for Garner Corporation? Multiple Choice .53 .72 1.25 1.68 1.88
The Capital Intensity Ratio is calculated using the following formula: Capital Intensity Ratio= Total Assets/ Sales Given data: Total Liabilities = $1,750 Equity = $4,450 Sales = $3,300 First, To find the total assets, use the accounting equation: Total assets = Total Liabilities+ Equity =$1750 + $4450 =$ 6200 Now, to calculate the Capital Intensity Ratio: Capital Intensity Ratio= Total Assets/ Sales = $6200 / $3300 =1.88
When evaluating financial planning steps, we must consider all of the following, except: Multiple Choice The planning horizon for the next 2 to 5 years. The project horizon for the next 30 to 90 days. How all small projects are added up for one big project. Identifying the total need investment for the plan. Sets of assumptions for various scenarios.
The project horizon for the next 30 to 90 days.
One advantage to well-executed financial planning is that the firm can _____. Multiple choice question. be sure of final outcomes of investments avoid surprises get ahead of the competition correct past mistakes
avoid surprises
The alternative sustainable growth rate formula, growth equals ROE times b, is correct only when total equity is taken from the _____. Multiple choice question. beginning of period balance sheet end of period income statement beginning of period income statement end of period balance sheet
beginning of period balance sheet Reason: The sustainable growth rate formula g = ROE × b is correct when total equity is taken from the beginning of period balance sheet.
Given an internal growth rate of 3 percent, a firm can: Multiple choice question. grow by more than 3 percent without any additional external financing. repay all of its outstanding debt. grow by 3 percent or less without any additional external financing. not grow.
grow by 3 percent or less without any additional external financing.
A commonly cited reason for financial failure is a lack of _____. Multiple choice question. effective long-range planning marketing savvy tax relief good relations with investors
effective long-range planning
A lack of effective long-range planning is commonly cited as a reason for _____. Multiple choice question. financial distress negative interest yields financial prosperity inflation
financial distress
A financial plan looks at what needs to be done in the _____. Multiple choice question. future present past
future
A financial plan looks at what needs to be done in the _____. Multiple choice question. present past future
future