Corporate Finance Chapter 4

The financial planning method in which accounts vary depending on a firm's predicted sales level is called the _____ approach. a. percentage of sales b. sales dilution c. sales reconciliation d. common-size e. time-trend

Percentage of Sales

The long-range time period, usually the next two to five years, over which the financial planning process focuses is known as the: a. planning horizon. b. planning strategy. c. planning agenda. d. short-run. e. current financing period

Planning Horizon

Managers of Today's World are currently in the process of updating their long-range financial plans and preparing revised pro forma statements. During this process, the managers will most likely focus on the next: a. 6 to 12 months. b. 1 to 3 years. c. 1 to 6 years. D. 2 to 5 years. e. 2 to 10 years.

2-5 years

The sustainable growth rate will be equivalent to the internal growth rate when: a. a firm has no debt. b. the projected growth rate is equal to the internal growth rate. c. the plowback ratio is positive but less than one. d. a firm has a debt-equity ratio exactly equal to one. e. the dividend payout ratio is zero.

A firm has no debt

Any external financing needed is generally covered by: a. the net income retained by the firm. b. adjusting accounts payable. c. adjusting the projected cash balance. d. adjusting the level of debt and/or equity. e. the projected operating cash flow

Adjusting the level of debt and or equity

The process by which smaller investment proposals of each of a firm's operational units are added up and treated as one big project is known as: a. separation. B. aggregation. c. conglomeration. d. appropriation. e. striation

Aggregation

Which of the following can affect a firm's sustainable rate of growth? I. total asset turnover II. profit margin III. dividend policy IV. equity multiplier 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

All of them

Financial planning: I. is an on-going process. II. must consider the constraints that exist both internally and externally. III. helps a firm establish priorities. IV. reconciles the activities of the various departments within a firm. 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

All the above

Alpha and Beta are two firms that are equal in every way except for their dividend payout ratios. Alpha has a 30 percent payout ratio while Beta has a 40 percent payout ratio. Given this difference,: a. Alpha's profit margin next year will exceed the Beta's profit margin. b. Alpha and Beta will continue to grow at the same rate over the next five years assuming neither firm utilizes any external financing. c. Alpha's plowback ratio is less than Beta's plowback ratio. d. Alpha has higher internal rate of growth than does Beta. e. Alpha has a lower sustainable rate of growth than does Beta

Alpha has a higher internal rate of growth than does Beta

A firm is currently operating at full capacity and owns sufficient assets to just support that level of sales. Sales are expected to increase at the internal rate of growth next year.Net working capital and operating costs are expected to increase directly with sales. The interest expense, the tax rate, and the dividend payout ratio are fixed. The net income is positive. Assume you are comparing next year's pro forma statements to this year's financial statements. Which one of the following values should be unchanged from this year? a. profit margin B. capital intensity ratio c. debt-equity ratio d. dividend amount e. plowback amount as a percentage of sales

Capital Intensity Ratio

The dividend payout ratio is calculated as: a. net income minus additions to retained earnings. b. cash dividends divided by the change in retained earnings. c. cash dividends divided by net income. d. net income minus cash dividends. e. one plus the retention ratio

Cash divideds divided by Net income

. Which one of the following is required to create pro forma financial statements? A. current capacity level of operations must be known b. debt-equity ratio must be constant c. dividend amount must be constant d. all expenses must vary directly with sales e. firm must be projected to operate at full capacity

Current Capacity level of operations must be known

When fixed assets on a pro forma statement are projected to increase at a rate equivalent to the projected rate of sales growth, it can be assumed that the firm is: a. projected to grow at the internal rate of growth. b. projected to grow at the sustainable rate of growth. c. creating excess capacity. d. currently operating at full capacity. e. retaining all of its projected net income

Currently operating at full capacity

If a firm bases its growth projection on the rate of sustainable growth, and has positive net income, then the: a. fixed assets will have to increase at the same rate, regardless of the current capacity level. b. number of common shares outstanding will increase at the same rate of growth. c. debt-equity ratio will have to increase. d. debt-equity ratio will remain constant while retained earnings increase. e. fixed assets, debt-equity ratio, and number of common shares outstanding will all increase at the same rate

Debt-equity ratio will remain constant while retained earnings increase

The composition of the liability and equity sections of a pro forma statement depend most heavily on a firm's: a. net working capital policies. b. financing and dividend policies. c. desired level of liquidity. d. capital budgeting and working capital policies. e. level of capacity utilization and net working capital policy

Financing and Dividend Policy

If a firm is at full-capacity sales, it means the firm is at the maximum level of production possible without increasing: a. net working capital. b. cost of goods sold. c. inventory. d. fixed assets. e. the debt ratio

Fixed Assets

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

Fixed Assets

Financial planning: a. focuses solely on the short-term outlook for a firm. b. forecasts the financial position of a firm on a divisional basis only. c. generally forecasts the financial position of a firm for the next two to five years. d. is a process that firms undergo once every five years. e. is limited to projecting the net income of a firm over the planning horizon

Generally forecasts the financial positions of a firm for the next 2-5 years

Financial planning: a. encourages managers to separate their goals from their plans. b. is generally based on the best-case scenario. c. is beneficial to smaller firms but has limited value to larger firms. d. helps managers establish priorities. e. prevents firms from encountering surprise events.

Helps managers establish priorities

Which of the following must you know to determine the fixed assets required to support a given level 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

I,II,III

Sales forecasts are: I. frequently based on macroeconomic projections. II. often influenced by industry forecasts. III. critical to the reliability of pro forma financial statements. IV. generally the basis for projecting future asset requirements. a. I and II only b. III and IV only c. II and III only d. I, II, and III only e. I, II, III, and IV

I,II,III,IV

Which of the following are basic components of a corporation's financial plan? I. dividend policy II. net working capital decision III. capital budgeting decision IV. capital structure policy 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

I,II,III,IV

Which of the following statements concerning pro forma financials are correct? I. The pro forma level of sales should consider macroeconomic forecasts. II. Pro forma statements should consider both the capital structure and the dividend policies of the firm. III. A pro forma balance sheet must always maintain a fixed debt-equity ratio. IV. A pro forma balance sheet must always consider the operating capacity level. a. I and II only b. III and IV only c. I, III, and IV only d. I, II, and III only e. I, II, and IV only

I,II,IV

Pro forma financial statements are: I. generally based on projected sales. II. guarantees of future performance. III. the output from a financial planning model. IV. projections of a firm's future financial position. a. IV only b. I and III only c. I and IV only d. II and IV only E. I, III, and IV only

I,III,IV

When utilizing the percentage of sales approach, managers: I. determine the level of sales required based on the desired profit margin percentage. II. need to identify which expenses are variable and which are fixed. III. need to determine the capital intensity ratio. IV. can ignore any projected dividends. a. I and II only B. II and III only c. III and IV only d. I, II, and IV only e. I, III, and IV only

II,III

One of the primary weaknesses of many financial planning models is that they: a. rely too much on financial relationships and too little on accounting relationships. b. are iterative in nature. c. ignore the goals and objectives of senior management. d. are based solely on best case assumptions. e. ignore the size, risk, and timing of cash flows

Ignore the size, risk and timing of cash flows

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 EFN, that need will be met by: a. accounts payable. b. long-term debt. c. fixed assets. d. retained earnings. e. common stock

Long Term Debt

The internal growth rate of a firm is best described as the: a. minimum growth rate achievable if the firm does not pay out any cash dividends. b. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable without external financing of any kind. d. maximum growth rate achievable without using any external equity financing while maintaining a constant debt-equity ratio. e. maximum growth rate achievable without any limits on the level of debt financing.

Maximum growth rate achievable without any external financing

The sustainable growth rate of a firm is best described as the: a. minimum growth rate achievable if the firm does not pay out any cash dividends. b. minimum growth rate achievable if the firm maintains a constant equity multiplier. c. maximum growth rate achievable without external financing of any kind. d. maximum growth rate achievable without using any external equity financing while maintaining a constant debt-equity ratio. e. maximum growth rate achievable without any limits on the level of debt financing

Maximum growth rate achievable without using any external equity financing while maintaining a constant debt-equity ratio

One of the primary advantages of financial planning is that it: a. concentrates solely on profits. B. reconciles planned activities with company priorities. c. establishes the highest possible growth rate at any cost. d. limits expansion to the maximum achievable internal rate of growth. e. eliminates future surprises and unplanned activities

Reconciles planned activities with company priorities

The plowback ratio: a. is equal to net income divided by the change in total equity. b. shows the percentage of net income available to the firm for future growth. c. plus the retention ratio must equal one hundred percent. d. is equal to the change in retained earnings divided by the dividends paid. e. represents the earnings returned to the shareholders

Shows the percentage of net income available to the firm for future growth

The retention ratio is calculated as: a. one plus the dividend payout ratio. B. the additions to retained earnings divided by net income. c. the additions to retained earnings divided by dividends paid. d. net income minus additions to retained earnings. e. net income minus cash dividends

The additions to retained earnings / Net income

Which one of the following statements concerning the capital intensity ratio is correct? a. The capital intensity ratio is equal to sales divided by total assets. b. The lower the capital intensity ratio, the greater the amount of assets required to support each dollar of sales. c. A highly capital-intensive firm will have a low capital intensity ratio. d. The capital intensity ratio is the amount of sales generated from each dollar of total assets. e. The capital intensity ratio is the amount of total assets required to generate one dollar of sales

The capital Intensity ratio is the amount of total assets required to generate on dollar of sales

You are comparing the current income statement of a firm along with a pro forma income statement for next year. The pro forma is based on a five percent increase in sales. The firm is currently operating at 82 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,: a. the net income shown on both statements is identical. b. the tax rate is assumed to increase at the same rate as the sales. c. the common size income statements for both years will be identical. d. next year's increase in retained earnings will equal this year's increase in retained earnings. e. total assets are required to also increase at a rate equal to the rate of sales growth

The common size income statements for both years will be identical

. A Procrustes approach to financial planning requires: a. a firm to produce a financial plan just once every ten years or so. b. little, if any, input from upper-level management. C. the planning staff to develop a plan which meets the goals set forth by upper-level managers. d. a firm to increase its capital intensity ratio. e. a firm to remain at its current level of fixed assets

The planning staff to develop a plan which meets the goals set forth by upper-level-managers

The Corner Hardware wants to maintain its current dividend policy, which is a payout ratio of 25 percent. The firm does not want to increase its equity financing but does want to maintain its current debt-equity ratio. The firm is profitable. The maximum rate at which The Corner Hardware can grow is equal to: a. 25 percent of the internal rate of growth. b. 25 percent of the sustainable rate of growth. c. the internal rate of growth. d. the sustainable rate of growth. e. 75 percent of the profit margin

The sustainable rate of growth

All else equal, the internal growth rate increases when the: a. retention ratio decreases. b. dividend payout ratio increases. c. net income decreases. D. total assets decrease. e. plowback ratio decreases.

Total Assets Decrease

One of the primary benefits of aggregation is gaining an understanding of the: a. interactions of the net working capital. b. total investment needs of the firm. c. trade-offs between debt and equity. d. trade-offs between the dividend policy and the plowback ratio. e. total asset turnover ratio

Total investment needs of the firm

When constructing a pro forma statement, net working capital generally: a. remains fixed. b. varies only when the firm is 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 proportionately with sales

Varies proportionately with sales

The external financing needed: a. will decrease if the projected level of sales is decreased. b. is unaffected by the dividend payout ratio. c. must be funded by debt financing. d. is prior to considering any potential increase in retained earnings. e. assumes a firm is operating at full capacity

Will Decrease if the projected level of sales is decreased

The capital intensity ratio is the: a. ratio of fixed assets to current assets. b. ratio of total assets to total equity. c. amount of fixed assets required to generate $1 in sales. d. amount of total assets required to generate $1 in sales. e. the amount of sales generated from every $1 in total assets

amount of total assets required to generate 1 in sales

Which one of the following is a benefit of financial planning? a. determining the amount of debt required over the planning horizon with absolute certainty b. knowing with certainty the amount of sales that will be generated over the planning horizon c. avoiding all surprises during the planning horizon d. allowing growth to exceed the financing available for that growth e. ascertaining the feasibility of a firm's goals

ascertaining the feasibility of a firm's goal

The sustainable growth rate: a. assumes there is no external financing of any kind. B. is normally higher than the internal growth rate. c. assumes the debt-equity ratio is variable. d. is based on receiving additional external debt and equity financing. e. assumes that all income is retained by the firm

is normally higher than the internal growth rate