Deck 19: Short-Term Financial Planning

Question 1

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

Answer 1

Current assets can be acquired in smaller increments

Question 2

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

Answer 2

Debt must increase by $171,429

Question 3

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

Answer 3

Planning model

Question 4

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 5

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 6

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 7

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 8

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 9

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 10

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

Question 11

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 12

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 Plowback = $3 million x .40 = $1.2 million

Question 13

Which statement is correct for a firm that forecasts net income of $200,000 and a reduction in retained earnings of $50,000?

A)Dividends will total $150,000
B)The plowback ratio is 25%
C)The payout ratio exceeds 1.0
D)This combination of account changes cannot occur

Question 14

Alternative "What if?" scenarios can be easily accommodated in financial planning by use of:

A)Sustainable growth models
B)Planning outputs
C)Spreadsheet programs
D)Bond covenants

Question 15

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 16

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 17

The firm's current financial statements would be included in:

A)The inputs of a financial plan
B)The planning model for the financial plan
C)The outputs of the financial plan
D)No part of the financial plan

Question 18

A potential downfall of using dividends as the plug item is that:

A)It may give shareholders mixed signals
B)Dividends are constant within a planning horizon
C)The firm may have to borrow cash to pay dividends
D)Shareholders may receive an excessive return

Question 19

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 20

A firm that admits to having "financial slack" has:

A)Uncommitted liquid assets or unused borrowing power
B)A low ROE but high leverage
C)More than sufficient cash to pay dividends
D)Grown at a rate less than its sustainable growth

Question 21

Firms that do not have to secure financing to carry out their financial plans are said to have:

A)Excessive hordes of cash
B)Financial slack.
C)Low plans for investing
D)Deteriorating credit quality

Question 22

Which of the following would be included as inputs to a firm's financial plan?

A)Capital, plant and labour resources
B)The firm's current product line
C)The current balance of retained earnings
D)Sales and economic forecasts

Question 23

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 24

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% If debt-equity ratio = .5, then 1/3 of the firm is debt financed and 2/3 of the firm is equity financed.
And 2/3 = 66.67%
Internal growth rate =

Question 25

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 26

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 27

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 28

Financial plans covering a short planning horizon rarely extend beyond:

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

Question 29

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 Sustainable growth rate = plowback ratio x ROE
)09 = .6 x

Question 30

The flexibility of financial plans is evident in the extent that:

A)Actual profits will deviate from projected profits
B)The plans can be adapted when conditions change
C)Use of the plans can be extended
D)Planning output is the same regardless of economic conditions

Question 31

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 Internal growth rate = plowback ratio x ROE x (equity/assets)
)06 = .41 x (.11 x asset turnover x 2) x .5
)06 = .2 x (.2 asset turnover)
)06/.04 = .04 asset turnover/.04

Question 32

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% Internal growth rate = retained earnings/assets
= ($500,000 x .06)/$10 million
= $300,000/10 million

Question 33

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 34

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 35

The purpose of debt covenants is to:

A)Prohibit borrowers from certain risky behaviour
B)Determine the optimal borrowing amount
C)Minimize the interest expense
D)Hasten the repayment of the loan

Question 36

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 37

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 38

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 39

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% Sustainable growth rate = plowback ratio x ROE
= (1 - payout ratio) x ROE
=

Question 40

A firm has $1 million in current sales volume and an internal growth rate of 15% .If sales are expected to increase by $100,000, then:

A)The firm's forecast will not be met
B)Dividends will have to be reduced
C)Retained earnings will increase by $50,000
D)External funding will not be required

Question 41

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 42

Which of the following statements is correct for a firm that has a sustainable growth rate that exceeds its projected growth rate in assets?

A)The projected growth in assets will be restricted
B)The internal growth rate will provide the remaining assets
C)The firm's ROE must increase
D)The debt-equity ratio will increase unless equity is issued

Question 43

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)$1.00 million
B)$1.71 million
C)$2.29 million
D)$3.00 million If debt is 75% as large as equity, then:
1)75 equity = $4.0 million

Question 44

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 45

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% sustainable growth rate = plowback ratio x ROE
= 60% x ($250,000/$1 million)
= 60% x 25%
= 15%

Question 46

Sensitivity analysis is used to:

A)Look at the consequence of varying many different assumptions at the same time
B)Predict the consequences of the business plan under the most likely set of circumstances
C)Vary assumptions, one at a time, in order to see their consequences on the business plan
D)Forecast demand if interest rates increase and a recession hits the economy

Question 47

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% internal growth rate = plowback x ROE x equity/assets
= )6 x .2 x (60/160)
= )12 x .375

Question 48

The final variable to have its value determined in a financial plan is often referred to as the:

A)Net income
B)Balancing item
C)Retained earning plowback
D)Growth forecast

Question 49

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 50

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 51

If entering a new market will not produce an immediate net present value, why would financial planners suggest entering this new market?

A)To create new core strengths
B)For the possibility of follow-up investments
C)The existing market is subject to takeover
D)To recover lost profits in their current market

Question 52

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 53

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 54

First-stage pro forma balance sheets do not determine:

A)Whether external financing is required
B)The need for additional fixed assets
C)The amount of the balancing item
D)The financing mix for external funding

Question 55

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 56

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 57

How will a percentage of sales model 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 58

Increased needs for net working capital are:

A)Recognized in pro forma balance sheets
B)Absorbed into the pro forma plug figures
C)Typically financed with debt
D)Ignored due to their great variability

Question 59

Which of the following is correct when a firm's pro forma statements project a net income of $5,000 and an external financing requirement of $2,000?

A)Dividends cannot exceed $3,000
B)Total assets cannot grow by more than $3,000
C)Retained earnings cannot grow by more than $5,000
D)The internal growth rate is 60%

Question 60

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 61

Relative to its assets, a firm with a large volume of retained earnings and a high ROE:

A)Will have a larger than average net income
B)Can generate a higher growth rate by raising more capital
C)Should increase its payout ratio
D)Can generate a higher growth rate without raising additional capital

Question 62

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 63

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% ROE = 150,000/900,000 = 16.67%
Internal growth rate = 0.30 x 0.1667

Question 64

A firm's internal growth rate is all of the following except:

A)The rate below which external financing is needed
B)The ratio of retained earnings to assets
C)The maximum growth rate without external sources of new capital
D)Determined by the plowback ratio, ROE, and the ratio of equity to assets

Question 65

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 66

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 67

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 68

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 69

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 70

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 71

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 72

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 New investment = 0.12 x $400,000

Question 73

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 74

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 75

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 76

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 77

A forecast using a percentage of sales model expects sales to increase by 20% over 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 78

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)24%
B)25%
C)26%
D)27% If = , then =
Internal growth rate = Plowback ratio * ROE_BEG *
)10 = Plowback ratio * .18 * .75
Plowback ratio = .10/(.18 * .75) = .74 = 74%

Question 79

Which of the following statements is not true regarding financial planning models?

A)They should include as much detail as possible
B)The results of a model are pro forma financial statements
C)The plug variable maintains consistency
D)Financial analysis is not used in financial planning

Question 80

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