Deck 3: Financial Planning and Growth

Question 1

In the financial planning model, external funds needed (EFN) is equal to:

A) assets less (liabilities - equity).
B) assets less (liabilities + equity).
C) (assets + liabilities) less equity.
D) (assets + equity) less liabilities.
E) assets less equity.

Answer 1

assets less (liabilities + equity).

Question 2

One key reason a long term financial plan is developed is because:

A) the plan determines your financial policy.
B) the plan determines your investment policy.
C) there are direct connections between achievable corporate growth and the financial plan.
D) there is unlimited growth possible in a well-developed financial plan.

Answer 2

there are direct connections between achievable corporate growth and the financial plan.

Question 3

In estimating pro-forma statement of financial position, projected retained earnings are computed as present retained earnings plus:

A) projected retained earnings and cash dividends.
B) projected retained earnings plus debt.
C) projected retained earnings plus assets.
D) projected net income minus cash dividends.
E) projected net income earnings minus debt.

Answer 3

projected net income minus cash dividends.

Question 4

Growth can be reconciled with the goal of maximizing firm value:

A) because greater growth always adds to value.
B) because growth must be an outcome of decisions that maximize NPV.
C) because growth and wealth maximization are the same.
D) because growth of any type cannot decrease value.

Question 5

The sustainable growth rate will be equivalent to the internal growth rate when:

A) a firm has no debt.
B) the growth rate is positive.
C) the plowback ratio is positive but less than 1.
D) a firm has a debt-equity ratio exactly equal to 1.
E) net income is greater than zero.

Question 6

An example of an economic assumption would be:

A) growth in sales.
B) growth in the capital spending requirement.
C) a plug variable.
D) change in interest rates.
E) growth in dividends.

Question 7

The most recent financial statements for REM Co. are shown below. Assets and costs are proportional to sales. Debt is not. A dividend of $90 was paid, and REM wishes to maintain a constant payout to net income. Next year's sales are projected to be $480. What is external funds needed (EFN)?

A) $240.00
B) $132.00
C) $60.00
D) $168.00

Question 8

Financial planning models frequently assume that many variables are proportional to:

A) economic growth.
B) industry growth.
C) interest rates.
D) company sales.

Question 9

A firm's planning model has assets and cash proportional to sales. The firm maintains a constant dividend payout ratio and a constant debt to equity ratio. Keying in on the asset to sales ratio, the firm's sustainable growth is _________ and ________ the asset to sales ratio.

A) higher; higher
B) higher; lower
C) lower; lower
D) constant; higher
E) constant; lower

Question 10

Sustainable growth is defined as the level of growth than an entity can:

A) maintain if it stays in the same business.
B) maintain if it does not change the accounting relationships or capital structure.
C) maintain if the net working capital is increased.
D) maintain if the sales force grows at the rate of inflation.

Question 11

The process of combining smaller projects into a large budget for planning purposes is called:

A) aggregation.
B) consolidation.
C) accumulation.
D) capital allocation.

Question 12

A firm has a fixed debt-to-equity ratio and dividend policy. Assets and net income are proportional to sales, and new equity will not be issued. Which of the following statements is most correct?

A) Almost any growth rate is theoretically possible.
B) Only one growth rate is possible.
C) The firm cannot grow.
D) The firm's growth rate must be less than some maximum.

Question 13

If accounts receivable are $45,000 and are directly proportional to total sales, the forecast accounts receivable for next year's 5% increase in sales to $125,000 would be:

A) $47,250.
B) $40,500.
C) $49,950.
D) impossible to calculate without last year's credit sales.

Question 14

The most recent financial statements for Matrix Chip are shown below. Assets, costs, and current liabilities are proportional to sales. Matrix Chip maintains a constant 50% dividend payout. No external financing is possible. What is the maximum percentage increase in sales that can be sustained?

A) 5.55%
B) 8.14%
C) 10.22%
D) 22.72%

Question 15

If a firm holds the dividend payout, the debt to equity ratio and outstanding shares constant while maintaining income and assets proportional to sales, the plug variable is:

A) short term debt.
B) retained earnings.
C) sustainable growth.
D) long term debt.
E) accounts receivable.

Question 16

The external funds needed (EFN) equation projects the addition to retained earnings as:

A) Net Profit Margin * $\Delta$ Sales.
B) Net Profit Margin * $\Delta$ Sales * (1 - d).
C) Net Profit Margin * Projected sales*(1 - d).
D) Projected sales * (1 - d).
E) Net Profit Margin * Projected sales.

Question 17

If forecasted net income is $3,600.00 and the expected dividend is $1,098 and the tax rate is 34%, what is the retention ratio?

A) 0.30.
B) 0.198.
C) 0.802.
D) 0.70.

Question 18

Projected future financial statements are called:

A) plug statements.
B) pro forma statements.
C) reconciled statements.
D) aggregated statements.

Question 19

The addition to retained earnings for the financial planning period is equal to:

A) Net Income + Taxes - Dividends.
B) Net Income - Dividends.
C) Net income + Depreciation - Dividends.
D) Sales - Dividend.

Question 20

Financial planning is concerned with the basic policy elements of:

A) investment decision, decisions on the amount of cash payments to shareholders, and the decision of which investment banker to choose.
B) the method of raising capital, investment decisions, and the level of growth to attain.
C) investment decisions, degree of financial leverage, and the decision on the amount of cash payments to shareholders.
D) degree of financial leverage, level of growth to attain, and investment decisions.

Question 21

Why is it important for managers to understand the importance of both the internal and the sustainable rates of growth?

Question 22

Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 40%. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to:

A) 40% of the internal rate of growth.
B) 60% of the internal rate of growth.
C) the internal rate of growth.
D) the sustainable rate of growth.
E) 60% of the sustainable rate of growth.

Question 23

A firm follows the objective of maximizing sales growth. Is maximizing growth always consistent with the shareholders objective and can a firm always achieve this objective if they are at the desired financial relationships for payout, debt to equity and asset structure.

Question 24

A firm wishes to maintain a growth rate of 4% per year, a debt-to-equity ratio of.26, and a dividend payout of 40%. If the profit margin is 10%, and next year's sales are projected at $500, what is the total asset projection?

Question 25

A firm wishes to maintain a growth rate of 12% per year and a dividend payout of 10%. The ratio of total assets to sales is constant at 1.5, and profit margin is 10%. What must be the debt-to-equity ratio?

A) 0.52
B) 0.67
C) 0.79
D) 0.84

Question 26

Which of the following will increase sustainable growth?

A) Buy back existing stock.
B) Decrease debt.
C) Increase profit margin.
D) Increase dividend payout ratio.

Question 27

The most recent financial statements for Quik-chip Co. are:

Question 28

It is easier to evaluate a firm using its financial statements when the firm:

A) is a conglomerate.
B) is global in nature.
C) uses the same accounting procedures as other firms in its industry.
D) has a different fiscal year than other firms in its industry.
E) tends to have one-time events such as asset sales and property acquisitions.

Question 29

A firm wishes to maintain a growth rate of 15% per year while maintaining a debt-to-equity ratio of 1.0, a profit margin of 20% and a dividend payout of 60%. What level of asset efficiency must it achieve?

Question 30

Assuming the following ratios are constant, what is the sustainable growth rate?

A) 6.67%
B) 5.13%
C) 4.06%
D) 8.46%

Question 31

The most recent financial statements for Nosa Co. are:

Question 32

Altering the inputs to a financial plan by changing one of the assumptions is called:

A) a redundancy check.
B) a pro forma evaluation.
C) goal seeking.
D) sensitivity analysis.

Question 33

Suppose a firm calculates its external funding needs and finds that it is negative. What are the firm's options in this case?

Question 34

Assuming the following ratios are constant, what is the sustainable growth rate?

Question 35

A firm wishes to maintain a growth rate of 10% per year and a debt-to-equity ratio of 1/2. The dividend payout is.2, and the ratio of total assets to sales is constant at 1.2. What must the profit margin be?

A) 10.00%
B) 9.09%
C) 11.11%
D) 8.00%

Question 36

State the assumptions that underlie the sustainable growth rate and interpret what the sustainable growth rate means.

Question 37

The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its:

A) rate of return on assets.
B) internal rate of growth.
C) average historical rate of growth.
D) rate of return on equity.
E) sustainable rate of growth.

Question 38

If a firm bases its growth projection on the rate of sustainable growth, and shows 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.

Question 39

The most recent financial statements for Valley View Distributors are:
Assets, short term debt and costs are proportional to sales. Long term debt is not. Dividends are 20%. Next year's sales are projected to be $3,600. What is external funds needed (EFN)?