Exam Prep Chapter 4 Long-Term Financial Planning And Growth

1.

Phil is working on a financial plan for the next three years. This time period is referred to as which one of the following? 
 

2.

Atlas Industries combines the smaller investment proposals from each operational unit into a single project for planning purposes. This process is referred to as which one of the following? 
 

3.

Which one of the following terms is applied to the financial planning method which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values? 
 

4.

Which one of the following terms is defined as dividends paid expressed as a percentage of net income? 
 

5.

Which one of the following correctly defines the retention ratio? 
 

6.

Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales? 
 

7.

The internal growth rate of a firm is best described as the: 
 

8.

The sustainable growth rate of a firm is best described as the: 
 

9.

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan?

I. How much net working capital will be needed?
II. Will additional fixed assets be required?
III. Will dividends be paid to shareholders?
IV. How much new debt must be obtained? 
 

10.

Financial planning: 
 

11.

Financial planning accomplishes which of the following for a firm?

I. determination of asset requirements
II. development of plans to contend with unexpected events
III. establishment of priorities
IV. analysis of funding options 
 

12.

Which of the following questions are appropriate to address during the financial planning process?

I. Should the firm merge with a competitor?
II. Should additional shares of stock be sold?
III. Should a particular division be sold?
IV. Should a new product be introduced? 
 

13.

Which one of the following statements concerning financial planning for a firm is correct? 
 

14.

You are getting ready to prepare pro forma statements for your business. Which one of the following are you most apt to estimate first as you begin this process? 
 

15.

Which one of the following statements is correct? 
 

16.

When utilizing the percentage of sales approach, managers:

I. estimate company sales based on a desired level of net income and the current profit margin.
II. consider only those assets that vary directly with sales.
III. consider the current production capacity level.
IV. can project both net income and net cash flows. 
 

17.

Which one of the following is correct in relation to pro forma statements? 
 

18.

When constructing a pro forma statement, net working capital generally: 
 

19.

A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume that the firm: 
 

20.

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 external financing need, that need will be met by: 
 

21.

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? 
 

22.

You are comparing the current income statement of a firm to the pro forma income statement for next year. The pro forma is based on a four percent increase in sales. The firm is currently operating at 85 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 information, which one of the following statements must be true? 
 

23.

A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of the following account values when compiling pro forma statements? 
 

24.

Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of sales? 
 

25.

Which of the following are needed to determine the amount of fixed assets required to support each dollar of sales?

I. current amount of fixed assets
II. current sales
III. current level of operating capacity
IV. projected growth rate of sales 
 

26.

The plowback ratio is: 
 

27.

A firm's net working capital and all of its expenses vary directly with sales. The firm is operating currently at 96 percent of capacity. The firm wants no additional external financing of any kind. Which one of the following statements related to the firm's pro forma statements for next year must be correct? 
 

28.

Which one of the following will increase the maximum rate of growth a corporation can achieve? 
 

29.

Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year? 
 

30.

A firm's external financing need is financed by which of the following? 
 

31.

Sales can often increase without increasing which one of the following? 
 

32.

Blasco Industries is currently at full-capacity sales. Which one of the following is limiting sales to this level? 
 

33.

All else constant, which one of the following will increase the internal rate of growth? 
 

34.

The external financing need: 
 

35.

Which one of the following will cause the sustainable growth rate to equal to internal growth rate? 
 

36.

The sustainable growth rate: 
 

37.

If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income and excess capacity, then the: 
 

38.

Sal's Pizza has a dividend payout ratio of 10 percent. The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy. The firm is profitable. Which one of the following defines the maximum rate at which this firm can grow? 
 

39.

Which of the following can affect a firm's sustainable rate of growth?

I. capital intensity ratio
II. profit margin
III. dividend policy
IV. debt-equity ratio 
 

40.

Financial plans generally tend to ignore which one of the following? 
 

41.

The financial planning process tends to place the least emphasis on which one of the following? 
 

42.

The financial planning process:

I. involves internal negotiations among divisions.
II. quantifies senior manager's goals.
III. considers only internal factors.
IV. reconciles company activities across divisions. 
 

43.

A Procrustes approach to financial planning is based on: 
 

44.

Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income? 
 

45.

Wagner Industrial Motors, which is currently operating at full capacity, has sales of $29,000, current assets of $1,600, current liabilities of $1,200, net fixed assets of $27,500, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 4.5 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year? 
 

46.

The Cookie Shoppe expects sales of $437,500 next year. The profit margin is 5.3 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings? 
 

47.

Gladsden Refinishers currently has $21,900 in sales and is operating at 45 percent of the firm's capacity. What is the full capacity level of sales? 
 

48.

The Corner Store has $219,000 of sales and $193,000 of total assets. The firm is operating at 87 percent of capacity. What is the capital intensity ratio at full capacity? 
 

49.

Miller Bros. Hardware is operating at full capacity with a sales level of $689,700 and fixed assets of $468,000. The profit margin is 7 percent. What is the required addition to fixed assets if sales are to increase by 10 percent? 
 

50.

Designer's Outlet has a capital intensity ratio of 0.92 at full capacity. Currently, total assets are $48,900 and current sales are $51,200. At what level of capacity is the firm currently operating? 
 

51.

Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current sales of $611,000. How much can the firm grow before any new fixed assets are needed? 
 

52.

Stop and Go has a 4.5 percent profit margin and an 18 percent dividend payout ratio. The total asset turnover is 1.6 and the debt-equity ratio is 0.45. What is the sustainable rate of growth? 
 

53.

R. N. C., Inc. desires a sustainable growth rate of 4.5 percent while maintaining a 40 percent dividend payout ratio and a 6 percent profit margin. The company has a capital intensity ratio of 1.23. What equity multiplier is required to achieve the company's desired rate of growth? 
 

54.

A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent. The capital intensity ratio is 1.2 and the debt-equity ratio is 0.64. What is the profit margin? 
 

55.

Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing. The firm maintains a constant debt-equity ratio of .0.55, a total asset turnover ratio of 1.30, and a profit margin of 9.0 percent. What must the dividend payout ratio be? 
 

56.

Cross Town Express has sales of $137,000, net income of $14,000, total assets of $98,000, and total equity of $45,000. The firm paid $7,560 in dividends and maintains a constant dividend payout ratio. Currently, the firm is operating at full capacity. All costs and assets vary directly with sales. The firm does not want to obtain any additional external equity. At the sustainable rate of growth, how much new total debt must the firm acquire? 
 

57.

The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio. What is the internal growth rate? 
 

58.

The Dog House has net income of $3,450 and total equity of $8,600. The debt-equity ratio is 0.60 and the payout ratio is 30 percent. What is the internal growth rate? 
 

59.

  

  

What is Major Manuscripts, Inc.'s retention ratio? 
 

60.

  

  

Major Manuscripts, Inc. does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm's maximum rate of growth? 
 

61.

  

  

If Major Manuscripts, Inc. decides to maintain a constant debt-equity ratio, what rate of growth can it maintain assuming that no additional external equity financing is available. 
 

62.

  

  

Major Manuscripts, Inc. is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 6 percent? 
 

63.

  

  

Major Manuscripts, Inc. is currently operating at 82 percent of capacity. All costs and net working capital vary directly with sales. The tax rate, the profit margin, and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 15 percent? 
 

64.

  

  

Assume the profit margin and the payout ratio of Major Manuscripts, Inc. are constant. If sales increase by 9 percent, what is the pro forma retained earnings? 
 

65.

  

  

Assume that Major Manuscripts, Inc. is currently operating at 97 percent of capacity and that sales are projected to increase to $20,000. What is the projected addition to fixed assets? 
 

66.

  

  

All of Fake Stone's costs and net working capital vary directly with sales. Sales are projected to increase by 3.5 percent. What is the pro forma accounts receivable balance for next year? 
 

67.

  

  

The profit margin, the debt-equity ratio, and the dividend payout ratio for Fake Stone, Inc. are constant. Sales are expected to increase by $1,062 next year. What is the projected addition to retained earnings for next year? 
 

68.

  

  

Assume that Fake Stone, Inc. is operating at full capacity. Also assume that all costs, net working capital, and fixed assets vary directly with sales. The debt-equity ratio and the dividend payout ratio are constant. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent? 
 

69.

  

  

Assume that Fake Stone, Inc. is operating at 88 percent of capacity. All costs and net working capital vary directly with sales. What is the amount of the pro forma net fixed assets for next year if sales are projected to increase by 13 percent? 
 

70.

  

  

Assume that Fake Stone, Inc. is operating at full capacity. Also assume that assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. What is the external financing need if sales increase by 12 percent? 
 

71.

  

  

Fake Stone, Inc. is projecting sales to decrease by 4 percent next year while the profit margin remains constant. The firm wants to increase the dividend payout ratio by 2 percent. What is the projected increase in retained earnings for next year? 
 

72.

  

  

What is the internal growth rate of Fake Stone, Inc. assuming the payout ratio remains constant? 
 

73.

  

  

What are the pro forma retained earnings for next year if Fake Stone, Inc. grows at a rate of 2.5 percent and both the profit margin and the dividend payout ratio remain constant? 
 

74.

  

  

Assume that net working capital and all of the costs of Fake Stone, Inc. increase directly with sales. Also assume that the tax rate and the dividend payout ratio are constant. The firm is currently operating at full capacity. What is the external financing need if sales increase by 4 percent? 
 

75.

  

  

Hungry Howie's is currently operating at 80 percent of capacity. What is the full-capacity level of sales? 
 

76.

  

  

Hungry Howie's is currently operating at 84 percent of capacity. What is the total asset turnover ratio at full capacity? 
 

77.

  

  

Hungry Howie's is currently operating at 96 percent of capacity. The profit margin and the dividend payout ratio are projected to remain constant. Sales are projected to increase by 5 percent next year. What is the projected addition to retained earnings for next year? 
 

78.

  

  

Hungry Howie's is currently operating at full capacity. The profit margin and the dividend payout ratio are held constant. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 9 percent. What is the external financing needed? 
 

79.

  

  

Hungry Howie's maintains a constant payout ratio. The firm is currently operating at full capacity. What is the maximum rate at which the firm can grow without acquiring any additional external financing? 
 

80.

  

  

Hungry Howie's is currently operating at 96 percent of capacity. What is the required increase in fixed assets if sales are projected to increase by 14 percent? 
 

81.

The most recent financial statements for Watchtower, Inc. are shown here (assuming no income taxes):

  

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's sales are projected to be $4,750. What is the amount of the external financing needed? 
 

82.

The most recent financial statements for Last in Line, Inc. are shown here:

  

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $992 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $21,830. What is the amount of the external financing need? 
 

83.

The most recent financial statements for 7 Seas, Inc. are shown here:

  

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. Like every other firm in its industry, next year's sales are projected to increase by exactly 16 percent. What is the external financing need? 
 

84.

The most recent financial statements for Benatar Co. are shown here:

  

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external equity financing is possible. What is the internal growth rate? 
 

85.

The most recent financial statements for Heng Co. are shown here:

  

Assets and costs are proportional to sales. The company maintains a constant 45 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued? 
 

86.

Consider the income statement for Heir Jordan Corporation:

  

A 22 percent growth rate in sales is projected. What is the pro forma addition to retained earnings assuming all costs vary proportionately with sales? 
 

87.

The Soccer Shoppe has a 9 percent return on assets and a 25 percent payout ratio. What is its internal growth rate? 
 

88.

The Parodies Corp. has a 22 percent return on equity and a 23 percent payout ratio. What is its sustainable growth rate? 
 

89.

Consider the following information for Kaleb's Kickboxing:

  

What is the sustainable rate of growth? 
 

90.

What is the sustainable growth rate assuming the following ratios are constant?

   
 

91.

Seaweed Mfg., Inc. is currently operating at only 84 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed? 
 

92.

Seaweed Mfg., Inc. is currently operating at only 86 percent of fixed asset capacity. Fixed assets are $387,000. Current sales are $510,000 and are projected to grow to $664,000. What amount must be spent on new fixed assets to support this growth in sales? 
 

93.

Fixed Appliance Co. wishes to maintain a growth rate of 8 percent a year, a constant debt-equity ratio of 0.42, and a dividend payout ratio of 50 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve? 
 

94.

A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10 percent. What must the debt-equity ratio be if the firm wishes to keep that ratio constant? 
 

95.

A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent. The current profit margin is 7 percent and the firm uses no external financing sources. What must the total asset turnover rate be? 
 

96.

Based on the following information, what is the sustainable growth rate of Hendrix Guitars, Inc.?

   
 

97.

Country Comfort, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $63,000 and dividends were $44,640. What is the sustainable growth rate? 
 

98.

The most recent financial statements for Moose Tours, Inc. follow. Sales for 2009 are projected to grow by 16 percent. Interest expense will remain constant; the tax rate and dividend payout rate will also remain constant. Costs, other expenses, current assets, and accounts payable increase spontaneously will sales. If the firm is operating at full capacity and no new debt or equity is issued, how much external financing is needed to support the 16 percent growth rate in sales?

  

   
 

99.

Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth? 
 

100.

Identify the four primary determinants of a firm's growth and explain how each factor could either add to or limit the growth potential of a firm. 
 

101.

A) What are the assumptions that underlie the internal growth rate and B) what are the implications of this rate? 
 

102.

Nelson's Landscaping Services just completed a pro forma statement using the percentage of sales approach. The pro forma has a projected external financing need of -$5,500. What are the firm's options in this case? 
 

103.

Smith & Daughters is getting ready to compile pro forma statements for the next few years. How can the managers establish a reasonable range of growth rates that they should consider during this planning process?