Deck 19: Long-Term Financial Planning

Question 1

Financial planning models routinely adjust for present value and risk.

Answer 1

False

Question 2

Financial planning focuses on the big picture.

Answer 2

True

Question 3

A typical horizon for long-term planning is five years.

Answer 3

True

Question 4

The decision to acquire fixed assets is unrelated to the current level of excess capacity.

Question 5

Financial managers should be trained early in their careers to question financial forecasts.

Question 6

Financial plans will succeed only if the forecasts are perfect.

Question 7

A firm cannot expect to expand its profit margin by acquiring one of its own suppliers.

Question 8

Financial planning is concerned with possible surprises as well as the most likely outcomes.

Question 9

Financial planning should attempt to minimize risk.

Question 10

Executives at Fruit Corporation forecast increased sales of 10% over the next year.$2,000,000 of assets will change in constant proportion to sales.If the addition to retained earnings is estimated to be $50,000,determine the required external financing.

A) $150,000
B) $200,000
C) $250,000
D) $300,000
E) $350,000

Question 11

Financial planning is a process of deciding which risks to take.

Question 12

Adaptability is not a desirable feature in financial plans.

Question 13

A planning horizon refers to the amount of time necessary to develop the financial plan.

Question 14

Financial planning is necessary because financing and investment decisions interact and should not be made independently.

Question 15

A forecast using a percentage of sales model expects sales to increase by 5% over each of the next four years.If costs are proportional to sales at 80%,and last year's sales were $1,000,the net income in the fourth year will be:

A) $48.62
B) $145.86
C) $227.60
D) $243.10

Question 16

A common,long-term corporate financial planning horizon would stretch for 15 to 20 years.

Question 17

Dave's Wax Inc.'s financial planners have projected a growth rate of 8% for the coming year.Currently,it has assets of $5,000,000 and retained earnings of $120,000.Calculate the amount of external financing Dave will need:

A) $0
B) $70,000
C) $184,000
D) $280,000

Question 18

The primary aim of financial planning is to obtain better forecasts of future cash flows and earnings.

Question 19

The dividend payout ratio is directly related to a firm's internal growth rate.

Question 20

Debt can be used as a plug item in financial planning.

Question 21

If a firm with an asset base of $3 million recently added $150,000 to retained earnings after a dividend payment of $100,000,then its internal growth rate is:

A) 1.67%
B) 3.33%
C) 5.00%
D) 8.33%

Question 22

Which of the following changes will decrease a firm's internal growth rate?

A) A decrease in dividends with a given net income
B) An increase in net income with a given dividend payout ratio
C) A decrease in the plowback ratio
D) A decrease in assets with a set dividend

Question 23

With respect to the balance sheet,an increase in equity of $2,000 with an increase in net income to $2,500,leads us to believe:

A) The firm paid a dividend of $500
B) The firm plowed $500 back into the company
C) $500 went into retained earning
D) Debt increased by $2,000

Question 24

An all equity financed firm has an asset turnover of 2,and its plowback ratio is 50%.Determine its Maximum payout ratio that will allow an 8% internally generated growth.

A) 25%
B) 33%
C) 45%
D) 67%

Question 25

How much is required in external financing if first-stage pro forma statements indicate $1 million in net income,$300,000 in dividends,and a $900,000 increase in total assets?

A) $200,000
B) $500,000
C) $800,000
D) No external financing is required.

Question 26

If a firm's sales increased by 12% and it has no spare capacity,it must increase fixed assets by:

A) 0%
B) 6%
C) 9%
D) 12%

Question 27

Calculate the rate at which the firm can grow without changing its leverage if its payout ratio is 70%,equity outstanding at the beginning of the year is $900,000,and its net income for the year is $150,000:

A) 5.00%
B) 11.67%
C) 14.00%
D) 16.67%

Question 28

Which of the following will not permit a higher internal growth rate,other things equal?

A) A higher plowback ratio
B) A higher debt-to-asset ratio
C) A higher return on equity
D) A higher return on assets

Question 29

What new investment is required for a firm that projects 12% growth has $400,000 in assets,and retained earnings of $40,000?

A) $0
B) $4,800
C) $8,000
D) $66,667

Question 30

An all equity financed firm has an asset turnover of 2 and its plowback ratio is 50%.Determine its net profit in order to finance a 8% internally generated growth.

A) 11%
B) 10%
C) 9%
D) 8%

Question 31

What is the sustainable growth rate for a firm with $250,000 in net income,$20,000 in preferred stock dividends,$80,000 in common stock dividends,and an average equity balance of $1 million?

A) 8%
B) 10%
C) 15%
D) 17%

Question 32

When most of the elements of a financial plan are related to sales levels,the plan is:

A) Less likely to be effective
B) Using sales as a plug figure
C) A percentage of sales model
D) Not adjusted for inflation

Question 33

If a firm uses external financing as a plug item,has a new capital budget of $2 million,a net income of $3 million,and a plowback ratio of 40%,how much should be raised in external funds?

A) $200,000
B) $600,000
C) $800,000
D) $1,200,000

Question 34

Outputs from a financial plan would include such items as:

A) Sales growth forecasts
B) A percentage of sales planning model
C) A pro forma statement of sources and uses of cash
D) The firm's current financial statements

Question 35

What is the maximum internal growth rate consistent with not requiring external funding for a firm reporting net income of $500,000,a dividend payout ratio of 40%,and total assets of $10 million?

A) 2%
B) 3%
C) 5%
D) 6%

Question 36

What is the required asset turnover for a firm with a 12% profit margin,50% equity,and a 40% dividend payout that wishes to grow at 6% using only internal funding?

A) 0.42
B) 0.56
C) 0.63
D) 1.00

Question 37

A major focus of financial planning is to:

A) Minimize a firm's risk
B) Maximize a firm's risk
C) Analyze and select risks for the firm
D) Train the firm's management to operate without risk

Question 38

What is the internal growth rate for a firm with an ROE of 20%,a dividend payout ratio of 40%,and an equity-debt ratio of 60%?

A) 4.50%
B) 5.39%
C) 8.00%
D) 12.00%

Question 39

What amount of debt should a firm include in its financing mix in order to achieve a sustainable growth rate of 9% while maintaining a 40% dividend payout,a 10% profit margin,and an asset turnover of 1.5?

A) 66.67% debt
B) 60.00% debt
C) 50.00% debt
D) Zero debt

Question 40

What is the sustainable growth rate for a firm with net income of $2.5 million,cash dividends of $1.5 million,and return on equity of 18%?

A) 3.0%
B) 5.4%
C) 7.2%
D) 10.8%

Question 41

What is the maximum dividend payout ratio consistent with not requiring external funds for a firm with an ROE of 15%,a debt-equity ratio of 50%,and an annual sales growth objective of 9%?

A) Approximately 1%
B) Approximately 10%
C) Approximately 12%
D) Approximately 20%

Question 42

The outputs of a financial planning model often include:

A) The firm's current financial statements
B) A range of macroeconomic forecasts
C) Cost projections for operating the planning models
D) Projected financial statements of the firm

Question 43

Which of the following is not a reason for building financial plans?

A) Considering options
B) Contingency planning
C) Choosing the optimal plan
D) Forcing consistency

Question 44

A firm has a debt equity ratio of 1/3,and plans to grow at an annual rate of 10%.Its return on equity is 18%.What is the maximum payout ratio that a company can maintain without resorting to new equity issue?

A) Approximately 24%
B) Approximately 25%
C) Approximately 26%
D) Approximately 27%

Question 45

If a firm's dividend payout ratio is determined after achieving a specific capital structure,then:

A) Dividends are an input to the financial plan
B) The capital budget should be revised
C) Dividends are being used as a plug item
D) Dividend forecasts become crucial to planning

Question 46

How will a percentage of sales models treat cost of goods sold if sales revenues are expected to grow by 20% to $1 million? Cost of goods sold will:

A) Grow at a slower rate than sales
B) Remain proportionate to sales
C) Be forecast to increase at the rate of inflation
D) Increase to $800,000

Question 47

A major difference between financial planning and forecasting is that financial planning:

A) Is forward-looking
B) Relies on the viewpoints of management
C) Determines the rate of profitability
D) Is equally concerned with less-likely outcomes

Question 48

Which of the following does not provide a "solution" to a projected growth rate in assets that exceeds the sustainable growth rate?

A) Increase the ROE
B) Allow the debt-equity ratio to increase
C) Increase the payout ratio
D) Issue new equity

Question 49

Financial plans covering a short planning horizon rarely extend beyond:

A) one year
B) three years
C) five years
D) ten years

Question 50

A firm's internal growth rate of 10% means that:

A) Sales can grow by 10% before external equity is needed
B) Retained earnings can increase by 10% before total assets will change
C) External capital will not be required unless sales growth exceeds 10%
D) Debt can increase by 10% before retained earnings will fall

Question 51

A firm that wants to increase its sustainable growth rate can do so by __________ the __________ ratio or by __________ the __________ or both.

A) Increasing; payout; increasing; ROE
B) Increasing; plowback; increasing; ROE
C) Decreasing; plowback; increasing; ROE
D) Decreasing; payout; decreasing; ROE

Question 52

Sources and uses of funds are made equal through:

A) A balancing item
B) Pro forma financial statements
C) Borrowing cash
D) Additions to retained earnings

Question 53

The observation that additions to fixed assets are "lumpier" than additions to current assets indicates that:

A) Fixed assets depreciate over time
B) Fixed assets can only be acquired through external funding
C) Current assets can be acquired in smaller increments
D) Dollar for dollar, fixed assets are more expensive than current assets

Question 54

Firms that maintain a constant ratio of debt-equity over a variable business cycle may find that:

A) Debt has grown too large, too fast
B) It is more difficult to maintain a stable dividend
C) Debt covenants always accommodate more debt, but often prevent debt prepayment
D) Equity is always less expensive to obtain than debt

Question 55

A firm's goal is to maintain a 75% debt-equity ratio.How much equity would be required if the results of a financial planning model indicate that the firm's assets will grow to $4 million?

A) Approximately $1.00 million
B) Approximately $1.71 million
C) Approximately $2.29 million
D) Approximately $3.00 million

Question 56

If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of .75 then:

A) Debt must increase by $300,000
B) Equity must increase by the full $400,000
C) Debt must increase by $171,429
D) Equity must increase by $100,000

Question 57

In a financial planning model:

A) Inputs are used to create the model
B) Financial ratios are used to create the model
C) Financial ratios are used to develop forecasts
D) Equations are used to develop financial statements

Question 58

The phrase,"Forecasts do not develop in a vacuum," is a reminder that:

A) Forecasters are known not to work well alone
B) Planners will offer ten plans when asked for one
C) Competitors also make plans and react to ours
D) Forecasts should be developed at headquarters

Question 59

Which of the following might indicate the correct choice of a plug figure if a financial plan shows sources of funds to be $100,000 and uses of funds to be $90,000?

A) External debt must increase by $10,000
B) Dividend payments must decrease by $10,000
C) Cash balances must increase by $10,000
D) The capital budget must decrease by $10,000

Question 60

Dividend policy is determined by all of the following except:

A) The debt-equity ratio
B) The need for funds
C) Forecasting
D) As a consequence of other planning decisions

Question 61

If it is determined in a first-stage pro forma balance sheet that additional funding will be required,then a second-stage pro forma will decide the:

A) Amount of the additional funds required
B) Financing mix of the additional funds required
C) Interest rate to be paid on the additional funds
D) Optimal mix of additional debt and equity

Question 62

The effects of a change in sales on working capital will be seen in which section of a financial plan:

A) Output section
B) Pro forma financial statements
C) Planning model
D) Sources and uses of funds

Question 63

To avoid inconsistency,financial planners should be sure to:

A) Draw information from many resources
B) Do all forecasting themselves
C) Produce perfectly accurate forecasts
D) Use forecasts based on common macroeconomic assumptions

Question 64

All of the following are part of the financial planning process except:

A) Deciding which risks are worth taking
B) Analyzing investment and financing options
C) Projecting the future
D) Minimizing risk

Question 65

Which of the following is not typically included among the three major requirements for effective planning?

A) Financing the plan
B) Selecting the best plan
C) Observing the plan unfold
D) Forecasting

Question 66

If the projected growth rate is smaller than the firm's sustainable growth rate:

A) It should increase its projected growth rate
B) The firm will be required to decrease its plowback ratio
C) Its debt-equity ratio will decrease
D) The firm will be required to increase borrowing

Question 67

Pro forma statements are:

A) Plans developed by a Certified Financial Planner
B) The inputs in the financial planning process
C) Projected financial statements
D) Deviations in results from previous financial plans

Question 68

The implications of the forecasts from a financial plan are determined by the:

A) Plan inputs
B) Balancing item
C) Planning model
D) Plowback ratio

Question 69

A planner's percentage of sales model forecasts that sales will grow by 20% next year.If costs of goods sold are proportionate at 70% of sales,then costs of goods sold will:

A) Grow to 90% of sales
B) Grow in dollars by 70%
C) Not change in dollar amount
D) Increase by 20% in dollar terms

Question 70

Planners have determined that sales will increase by 20% next year,and that the profit margin will remain at 10% of sales.Which of the following statements is correct?

A) Profit will grow by 20%
B) The profit margin will grow by 10%
C) Profit will grow proportionately faster than sales
D) 10% of the increase in sales will become net income

Question 71

If a firm chooses to maintain a fixed debt-equity ratio,they can raise the additional needed funds by:

A) Issuing debt, in which case dividends become the balancing item
B) Issuing debt, in which case the amount of debt itself becomes the balancing item
C) Issuing stock, in which case dividends become the balancing item
D) Issuing stock, in which case no balancing item is needed

Question 72

Which of the following statements is correct concerning the internal growth rate?

A) It is maximized when the payout ratio equals zero
B) It is maximized when the plowback ratio equals zero
C) It cannot be less than the sustainable growth rate
D) It decreases as total assets decrease

Question 73

Which of the following statements is correct concerning the sustainable growth rate?

A) It increases as ROE decreases
B) It increases as the payout ratio decreases
C) It is maximized when the plowback ratio equals zero
D) It is always less than the internal growth rate

Question 74

If sales growth for XYZ Corporation exceeds 6%,which in turn causes XYZ to seek external financing,then 6% is the:

A) External growth rate
B) Internal growth rate
C) Optimal growth rate
D) Sustainable growth rate

Question 75

Increases in sales are typically accompanied by:

A) More than proportionate increases in fixed assets
B) Less than proportionate decreases in debt
C) More than proportionate decreases in dividends
D) Less than proportionate increases in working capital

Question 76

A firm's required external financing is determined by the:

A) Firm's projected growth rate
B) Sustainable growth rate
C) Plowback ratio
D) Amount of external financing available

Question 77

One potential difficulty with expressing plan objectives in the form of specific profit margins is that:

A) Economic conditions can change.
B) This gives limited guidance about the best overall strategies.
C) Many corporate goals are interrelated.
D) The margins may not be met.

Question 78

The rate at which the assets of a firm can grow without the requirement of external sources of financing is the:

A) Internal growth rate
B) Sustainable growth rate
C) Pro forma growth rate
D) Plowback rate

Question 79

A firm's sustainable growth rate represents the:

A) Highest growth rate without decreasing the dividend
B) Highest growth rate without increasing financial leverage
C) Percentage change in sales times the profit margin
D) Possible growth without jeopardizing net working capital

Question 80

When a firm is said to have no spare capacity,it:

A) Has no need for new employees
B) Currently has no inventory available for sale
C) Must issue new equity to grow
D) Must increase fixed assets to increase sales