Intro to finance chapter 4
True or false: The financial planning process will not change from firm to firm.
False
When constructing a pro forma income statement, the first step is to supply:
a sales figure
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
The alternative sustainable growth rate formula, growth equals ROE times b, is correct only when total equity is taken from the _____.
beginning of period balance sheet
A commonly cited reason for financial failure is a lack of _____.
effective long-range planning
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:
$100,000
Growth, by itself, _______(is/isn't) a good financial goal.
Isn't
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)?
$1.2 million Reason: $2.7m - 1.5m = $1.2m
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?
$340 million
Galting Corporation is operating at 80% of capacity. This means that the current sales level is:
80% of the full capacity sales level
In a financial plan using the percentage of sales approach, why is it assumed that assets increase with sales?
Additional working capital and fixed assets are needed to support growth
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.
False
True or false: Financial planning addresses all the basic elements of firm value.
False
True or false: Given external financing needs in a financial plan, the firm must borrow both long- and short-term funds.
False Reason: The financing decision is separate from the financial plan.
Which of the following is true about the sustainable growth rate?
It is the maximum rate of growth a firm can maintain without increasing its financial leverage
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 total asset turnover will increase ROE, and therefore sustainable growth.
increase
All else equal, a(n)____________(decrease/increase) in the debt-equity ratio will increase ROE, and therefore sustainable growth.
increase
An increase in a firm's total asset turnover will ______ the sustainable growth rate.
increase
An increase in the profit margin will ______ a firm's sustainable growth rate.
increase
An increase in the profit margin, all else equal, will _________(decrease/increase) ROE.
increase
If a firm increases its debt-equity ratio it will _____ its sustainable rate of growth.
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
Across firms, the financial planning process _____.
is different for each firm
Financial planning is a(n) _____ process.
iterative
Given a firm requires external financing, the firm has multiple options including short- and long-term borrowing, and _____.
new equity
Growth, by itself, is:
not an appropriate goal
One of the main things financial________ accomplishes is to force managers to think about goals and establish priorities.
planning
The _____ ratio is equal to 1 minus the dividend payout ratio.
plowback
When using pro forma statements, the financial statements are the form we use to summarize the different events _____.
projected for the future
Another name for the plowback ratio is the _______ ratio.
retention
The aggregation process determines the total _____.
needed investment
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.
sales
The percentage of__________ approach is a financial planning method in which accounts are varied depending on a firm's predicted sales level.
sales
The_______ growth rate is the maximum rate of growth a firm can maintain without increasing its financial leverage.
sustainable
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)?
$405,000 Reason: $800,000 - 395,000 = $405,000
Which of the following are likely to be accomplished with financial planning?
-Avoiding surprises -Exploring options
Based on ROE and the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?
-Dividend policy -Financial policy -Profit margin
Which of the following are common elements of a financial planning model?
-Economic assumptions -Sales forecast -Pro forma statements
A financial planning model can be used to test the feasibility of a planned growth rate because it incorporates which of the following?
-The asset turnover rate -The firm's use of financial leverage -The firm's dividend policy
The______ payout ratio is equal to the cash ________ divided by the net income.
-dividend -dividend
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 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?
An increase in the dividend payout ratio
The text quotes conventional business wisdom as saying that financial plans don't work, but financial planning does. What does that mean?
Because financial plans are forecasts, they seldom happen as foreseen, but they allow managers to examine goals and prioritize
In a financial plan, how is the amount of borrowing determined?
By management
Which of the following are often left out of most financial planning models?
Cash flow size, risk, and timing
What does it mean if a company's capital intensity ratio is 2.4?
The firm requires $2.40 in assets to generate $1 in sales.
The smaller investment proposals of each operational unit are added up, and the sum is treated as one big project, which is called __________.
aggregation
The sustainable growth rate can be used to _____.
assess planned growth
One advantage to well-executed financial planning is that the firm can _____.
avoid surprises
The ratio of total assets to sales is known as the _____.
capital intensity ratio
The ____ ratio equals the cash dividend divided by the net income
dividend payout
The _____ ratio equals the cash dividend divided by the net income.
dividend payout
The amount of long-term borrowing is something set by management, and it _____.
does not necessarily relate directly to the level of sales
The primary benefit of financial planning is that it _____.
ensures internal consistency among the firm's various goals
A lack of effective long-range planning is commonly cited as a reason for _____.
financial distress
Pro___________statements are one of the key elements of financial planning.
forma
A financial plan looks at what needs to be done in the _____.
future
All else equal, when the rate of growth in sales or assets in a financial plan is higher, external financing needs will be
greater.
Given an internal growth rate of 3 percent, a firm can:
grow by 3 percent or less without any additional external financing.
