Deck 18: Long-Term Financial Planning

Question 1

Financial planning should attempt to minimize risk.

Answer 1

False

Question 2

Financial models ensure consistency between growth assumptions and financing plans,and they identify the best financing plan.
Financial models ensure consistency between growth assumptions and financing plans,but they do not identify the best financing plan.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Financial planning just means formulating the company's response to the most likely events.

Question 5

Pro formas are projected or forecasted financial statements.

Question 6

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

Question 7

A typical horizon for long-term planning is 5 years.

Question 8

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

Question 9

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

Question 10

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

Question 11

Individual capital investment projects are not considered in a financial plan unless they are very large.

Question 12

Financial planning requires accurate and consistent forecasting.

Question 13

Financial planning focuses on the big picture.

Question 14

If factories are operating below full capacity,sales can increase without investment in fixed assets.However,beyond some sales level,new capacity must be added (and additional investment in fixed assets must be made).

Question 15

Adaptability is not a desirable feature in financial plans.

Question 16

The sustainable growth rate is the rate at which the firm can grow without changing its leverage ratio.

Question 17

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

Question 18

Financial plans will rarely succeed unless the forecasts are perfect.

Question 19

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

Question 20

Financial planning models must include as much detail as possible.

Question 21

Percentage of sales models are planning models in which the sales forecasts are the driving variables and most other variables are proportional.

Question 22

Planners often recommend entering a market for "strategic" reasons because:

A) the company is facing too much competition in its original market.
B) the company may have valuable follow-on investments after establishing itself in the new market.
C) the immediate investment has a positive net present value.
D) all of these.

Question 23

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 24

Pro formas refer to:

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 25

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 26

The balancing items in a financial planning model are variables that adjust to maintain the consistency of a financial model.They are also known as plugs.

Question 27

A firm has $4 million in total assets and $2.2 million in equity.How much of its $500,000 capital budget should be debt-financed to retain the same debt-equity ratio?

A) $50,000
B) $225,000
C) $275,000
D) $450,000

Question 28

Financial planning models routinely adjust for present value and risk.

Question 29

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 30

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 31

Financial plans draw out the connections between:

A) the firm's plans for growth and the financing requirements.
B) profit margins and sales growth.
C) accounting ratios and operational business decisions.
D) all of these.

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

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 34

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 35

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

Question 36

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 37

Calculate the rate at which a 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 38

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 39

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 40

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 41

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 42

Financial plans covering a short planning horizon rarely extend beyond:

A) 1 year.
B) 3 years.
C) 5 years.
D) 10 years.

Question 43

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 44

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 45

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 46

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) Ten percent of the increase in sales will become net income.

Question 47

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% without increasing financial leverage?

A) .42
B) .56
C) .63
D) 1.00

Question 48

Contingency planning is:

A) forecasting the most likely outcomes.
B) worrying about unlikely events.
C) working through the consequences of the plan under different scenarios.
D) formulating responses to inevitable surprises.

Question 49

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 be acquired only 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 50

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 earnings plowback.
D) growth forecast.

Question 51

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 10 plans when asked for 1.
C) competitors also make plans and react to ours.
D) forecasts should be developed at headquarters.

Question 52

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 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

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 55

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 56

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

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

Question 57

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 58

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 59

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 60

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 61

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 62

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 63

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 64

A forecast using a percentage of sales model expects sales to increase by 5% annually over the next 4 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 65

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

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

Question 66

Under which of the following capital structures will a firm's internal growth rate exceed its sustainable growth rate?

A) Total debt-to-asset ratio equals 35%.
B) Equity-to-debt ratio equals 60%.
C) Equity-to-debt ratio equals 125%.
D) None of these.

Question 67

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 68

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 69

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 70

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 71

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 72

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 73

Sources and uses of funds are made equal through:

A) a balancing item.
B) pro forma financial statements.
C) borrowed cash.
D) additions to retained earnings.

Question 74

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 75

To avoid inconsistency,financial planners should be sure to:

A) draw information from many different resources.
B) do all forecasting themselves.
C) produce perfectly accurate forecasts.
D) use forecasts based on common macroeconomic assumptions.

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 earnings.
D) debt increased by $2,000.

Question 77

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 78

Which effort will help a firm boost its internal growth rate?

A) Plowing back a high proportion of its earnings
B) Achieving a high return on equity
C) Maintaining a low debt-to-asset ratio
D) All of these

Question 79

Which of the following is not typically included among the three major components of a financial planning model?

A) Inputs: current financial statements, forecasts of key variables
B) Planning model: equations specifying key relationships
C) Outputs: pro formas, financial ratios, sources and uses of cash
D) Intuitions: common sense, guesses

Question 80

If a firm chooses to maintain a fixed debt-equity ratio,it 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.