Deck 19: Financial Planning and Managing Growth

Question 1

The financing plan documents a firm's long-term goals, the strategies that management will use to achieve the goals, and the capabilities that the firm needs to sustain its competitive position.

Answer 1

False

Question 2

In the financing plan of a firm, management states that the firm will seek to raise funds externally even if sufficient internally generated funds are available to fund projects.

Answer 2

False

Question 3

The financial plan includes the cash budget, which identifies the time line for cash inflows and outflows included in divisional business plans.

Answer 3

True

Question 4

Investment and financing policy decisions are not considered inputs in financial planning models.

Question 5

Financial planning models are not considered an integral part of financial planning.

Question 6

The outputs of the financial planning model are a series of pro forma financial statements and financial ratios based on these statements.

Question 7

Pro forma financial statements that result from financial planning models are always perfectly balanced.

Question 8

The financing plan deals with how a firm is going to secure the funds needed to pay for the capital resources required.

Question 9

In putting together a financial plan, management addresses three main issues through their strategic plan, investment plan, and financing plan.

Question 10

The investment plan of a firm addresses the issue of what capital resources the management needs to get to achieve its goals.

Question 11

The strategic plan of a firm addresses the issue of what capital resources the management needs to achieve its goals.

Question 12

Since sales are often correlated with the regional or national economy, economic forecasts are incorporated into the financial planning model.

Question 13

Financial statements and sales forecasts are considered major inputs in financial planning models.

Question 14

The financial plan focuses only on strategic planning and investment planning.

Question 15

Financial planning deals with establishing sales forecasts for a time horizon set by a firm's management.

Question 16

Financial models provide management with the ability to prepare projected financial statements.

Question 17

Financial planning helps management to establish financial and operating goals for a firm and to communicate those goals throughout the firm.

Question 18

Once capital investments are made, they are almost impossible to be reversed.

Question 19

Capital expenditures can be one-time investments or routine investments that allow a firm to continue its operations.

Question 20

The strategic plan identifies major areas for investments in productive assets, and also identifies mergers, alliances, and divestitures to strengthen a firm's business portfolio.

Question 21

The percent of sales model is a complex financial planning model.

Question 22

The strategic plan identifies

A) the lines of business in which a firm will compete.
B) major areas of investment in productive assets.
C) capital expenditures, acquisitions, and new lines of business.
D) All of these

Question 23

Which of the following questions are addressed in a financial plan?

A) Where is the company headed?
B) What capital resources does the management need to get there?
C) How is the firm going to pay for the resources needed?
D) All of these

Question 24

The capital intensity ratio measures the dollar amount of sales per dollar invested in assets.

Question 25

The higher a firm's plowback ratio, the higher is its sustainable growth rate.

Question 26

The sustainable growth rate is the rate of growth that a firm can sustain without issuing additional equity while maintaining the same capital structure.

Question 27

Which of the following components make up a financial plan?

A) The strategic plan
B) The investment plan
C) The financing plan
D) All of these

Question 28

Holding the growth rate constant, the higher a firm's dividend payout ratio, the larger the amount of external debt or equity financing needed.

Question 29

In the percent of sales model, all income statement and balance sheet accounts vary directly with sales.

Question 30

The lower a firm's ROE, the lower is the firm's sustainable growth rate.

Question 31

Projected or pro forma statements can be used to analyze the investment alternatives, but are not used to estimate the amounts of external funding needed.

Question 32

The sustainable growth rate is the rate of growth that a firm can sustain without issuing additional debt.

Question 33

Fixed assets vary directly with sales when firms are operating at less than full capacity.

Question 34

Which of the following questions are NOT addressed in a firm's financial plan?

A) What is the growth rate for the firm's main competitor?
B) Where is the firm headed?
C) What capital resources does the management need to get there?
D) How is the firm going to pay for the resources needed?

Question 35

The higher a firm's dividend payout ratio, the higher is the firm's internal growth rate.

Question 36

Lumpy assets are added as large discrete units and initially may not be used to full capacity.

Question 37

When a firm maintains a constant dividend policy, the firm's growth rate has no bearing on the external financing needed.

Question 38

Firms that are not highly capital intensive tend to riskier than similar firms that use less fixed assets.

Question 39

The strategic plan does NOT identify

A) major areas of investment in productive assets.
B) future mergers, alliances, and divestitures.
C) working capital strategies.
D) the lines of business a firm will compete.

Question 40

Sales are often correlated with the regional or national economy, so it is not necessary to incorporate economic forecasts into the model.

Question 41

A financial plan includes

A) the strategic plan, financing plan, and options plan.
B) the strategic plan, investment plan, and financing plan.
C) the financing plan, investment plan, and options plan.
D) None of these

Question 42

The financial planning model focuses on

A) the inventory accounting method decision and the accounts payables decision.
B) the current assets decision and the current liabilities decision.
C) the investment decision and the financing decision.
D) None of these

Question 43

The sales forecasts used in financial planning models

A) are developed using a variety of techniques.
B) are generated within the firm.
C) utilize macroeconomic variables as input.
D) All of these

Question 44

Which of the following statements is NOT true about financial planning models?

A) Financial statements serve as the first major input and become the baseline to compare the projected financial statements.
B) Economic forecasts and their impact on the firm's sales are also included in financial planning models.
C) Investment and financing decisions are not considered as inputs in financial planning models.
D) Changes in a firm's balance sheet and income statement items as a result of the growth in sales are also used in these models.

Question 45

Which of the following statements is NOT true about more sophisticated financial planning model?

A) Only fixed costs change directly with sales.
B) Working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales.
C) Fixed assets do not always vary directly with sales.
D) All of these

Question 46

Which of the following is true of capital expenditures?

A) They are part of a firm's investment plan.
B) Once a capital investment is made, it is almost always impossible to be reversed.
C) Capital expenditures can be one-time investments or routine investments that allow a firm to continue its operations.
D) All of these

Question 47

A firm paid out $163,961.60 as dividends on net income of $298,112. What is the firm's retention ratio?

A) 55%
B) 45%
C) 50%
D) None of these

Question 48

The financing plan of a firm will indicate

A) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm's dividend policy.
B) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm's working capital policy.
C) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the firm's dividend policy, and the firm's working capital policy.
D) the firm's dividend policy, the desired capital structure for the firm, and the firm's working capital policy.

Question 49

Which of the following is a part of a financing plan?

A) The dollar amount of funds that has to be raised externally and the sources of funds available to a firm
B) The desired capital structure for a firm
C) A firm's dividend policy
D) All of these

Question 50

Michael Holdings, Inc. has total assets of $1,480,072 and sales of $2,236,625. What is the firm's capital intensity ratio? (Round to two decimal places.)

A) 66.17%
B) 53.73%
C) 151.14%
D) None of these

Question 51

Which of the following statements is NOT true?

A) Sales forecasts models are typically very basic and use no complicated analysis.
B) Sales forecasts are generated within a firm.
C) Sales forecasts utilize economic variables as input.
D) All of these

Question 52

The inputs used in building financial planning models include

A) financial statements, sales forecasts, and a firm's investment and financial policy decisions.
B) pro forma statements, sales forecasts, and macroeconomic variables.
C) pro forma statements, sales forecasts, and financing decisions.
D) None of these

Question 53

Which of the following is NOT an input in financial planning models?

A) Financial statements
B) Pro forma financial statements
C) Investment decisions
D) Financing decisions

Question 54

Drekker, Inc. has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm's dividend payout ratio and retention ratio. (Round your percentage answers to nearest whole number.)

A) 85%, 15%
B) 45%, 55%
C) 55%, 45%
D) 15%, 85%

Question 55

As sales increase, a firm needs to _____ proportionately to support the _____.

A) increase the level of fixed assets; increase the level of inventory
B) increase the level of inventory; higher sales level
C) increase the level of inventory; increase the level of fixed assets
D) None of these

Question 56

Financial planning models

A) help management make investment decisions.
B) help management make financing decisions.
C) make the analysis faster and accurate.
D) All of these

Question 57

Planning models that are more sophisticated than the percent of sales method have

A) all variable costs change directly with sales.
B) working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales.
C) fixed assets that do not always vary directly with sales.
D) All of these

Question 58

Which of the following statements is NOT true for a firm that operates below full capacity?

A) Fixed assets can vary directly with sales.
B) Fixed assets will not vary directly with sales.
C) Fixed assets per unit can be incrementally changed.
D) All of these

Question 59

Which of the following statements is NOT true?

A) The ratio of total assets to sales is called the capital intensity ratio.
B) The ratio of sales to total equity is called the capital intensity ratio.
C) The higher the capital intensity ratio, the more capital a firm needs to generate sales.
D) Firms that have high capital intensive ratios are riskier than similar firms that use less fixed assets.

Question 60

Comacho Traders has total assets of $513,480 and sales of $723,062. What is the firm's capital intensity ratio? (Round to two decimal places.)

A) 1.41
B) 0.71
C) 1.23
D) None of these

Question 61

Firms that achieve higher growth rates without requiring external financing

A) have a high plowback ratio.
B) have less equity and/or are able to generate high net income leading to a high ROE.
C) are not highly leveraged.
D) All of these

Question 62

Which of the following statements about using more sophisticated planning models is NOT true?

A) Current liabilities are likely to vary directly with sales.
B) Long-term liabilities and equity accounts change as a direct result of managerial decisions.
C) Retained earnings will vary directly as sales changes.
D) All of these

Question 63

Which of the following statements is true about the capital budgeting process?

A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders.
B) Rapid growth is considered a desirable achievement in capital budgeting decisions.
C) The cost of the projects should comply with the firm's budget constraints.
D) All of these

Question 64

The sustainable growth rate (SGR)

A) is a function of the plowback ratio and the ROE.
B) the rate of growth that a firm can sustain without selling additional shares of equity.
C) helps management to determine whether they can avoid issuing new equity.
D) All of these

Question 65

Which of the following statements is NOT true?

A) The internal growth rate (IGR) is defined as the maximum growth rate that a firm can achieve without external financing.
B) The higher the retained earnings generated by a firm, the higher the growth possible without using external funding.
C) Given the same level of retained earnings, a firm that has the higher amount of total assets has a higher growth possibility without using external funding.
D) All of these

Question 66

Which of the following statements about using more sophisticated planning models is true?

A) Current liabilities are likely to vary directly with sales.
B) Long-term liabilities and equity accounts change as a direct result of managerial decisions.
C) Retained earnings will vary as sales changes but not directly as it is affected by the firm's dividend payout policy.
D) All of these

Question 67

Which of the following statements about accounting for changes in fixed assets is NOT true?

A) When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets.
B) Since it requires time to get new assets operational, they are added in small discrete quantities.
C) Fixed assets are added in large discrete units called lumpy assets.
D) All of these

Question 68

Which of the following statements about the sustainable growth rate (SGR) is NOT true?

A) The SGR is a function of the plowback ratio and the ROE.
B) The SGR determines the rate of growth that a firm can sustain without selling additional shares of equity.
C) The SGR helps management to determine whether they can avoid issuing new debt.
D) All of these

Question 69

Firms that achieve higher growth rates without seeking external financing

A) have a low plowback ratio.
B) have less equity and/or are able to generate high net income leading to a high ROE.
C) are highly leveraged.
D) None of these

Question 70

Swan Supply Company has net income of $1,212,335 on assets of $12,522,788 and retains 70 percent of its income every year. What is the company's internal growth rate? (Do not round intermediate calculations. Round final answer to one decimal place.)

A) 7.6%
B) 6.8%
C) 8.6%
D) 9.3%

Question 71

Tradewinds Corp. has revenues of $9,651,220, costs of $6,080,412, interest payment of $511,233, and a tax rate of 34 percent. It paid dividends of $1,384,125 to shareholders. Find the firm's dividend payout ratio and retention ratio (Round the percentage answer to nearest whole number.)

A) 66%, 34%
B) 25%, 75%
C) 69%, 31%
D) 34%, 66%

Question 72

Which of the following statements is NOT true about the capital budgeting process?

A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders.
B) Rapid growth is considered a desirable achievement in capital budgeting decisions.
C) Once the list is made, no management review can change it.
D) All of these

Question 73

Tangent Inc. has revenues of $4,375,233, costs of $2,467,321, and pays a tax rate of 34 percent. If the firm pays out 60 percent of its earnings as dividends every year, what is the amount of retained earnings? (Round final answer to two decimal places.)

A) $171,254.18
B) $755,533.15
C) $503,688.77
D) None of these

Question 74

Which of the following are a weakness of financial planning models?

A) Interest expense is not accounted.
B) All working capital accounts do not necessarily vary directly with sales, especially cash and inventory.
C) The way fixed assets are handled as lumpy assets, leaving the company with excess capacity.
D) All of these

Question 75

External funding needed (EFN) is defined as

A) the additional debt or equity a firm needs to issue so that it can purchase additional assets to support an increase in sales.
B) the additional funds raised by a firm to pay off existing short-term debt.
C) the additional funds raised by a firm to pay off existing long-term debt.
D) None of these

Question 76

Mercantile Co. has net income of $3,413,500 on assets of $16,109,445 and retains 55 percent of its income every year. What is the company's internal growth rate? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) 21.21%
B) 8.62%
C) 11.65%
D) 9.43%

Question 77

Dennis Compton, Inc. has total assets of $5,335,901 and a capital intensity of 53.9%. What is the firm's sales? (Round to nearest whole dollar.)

A) $5,335,901
B) $2,828,028
C) $9,899,631
D) None of these

Question 78

Hilton Corp. has revenues of $1,214,800, costs of $816,355, and pays a tax rate of 32 percent. If the firm pays out 50 percent of its earnings as dividends every year, what is the amount of retained earnings?

A) $135,471.30
B) $270,942.60
C) $413,032.00
D) None of these

Question 79

Which of the following statements about accounting for changes in fixed assets is NOT true?

A) When a firm is not operating at full capacity, sales may be decreased without adding any new fixed assets.
B) Since it requires time to get new assets operational, they are added as the firm nears full capacity.
C) Fixed assets are added in large discrete units called lumpy assets.
D) All of these

Question 80

Which of the following statements about the sustainable growth rate (SGR) is true?

A) The higher a firm's ROE, the higher the SGR.
B) The higher the plowback ratio, the larger the proportion of net income retained in the firm and the greater the firm's SGR.
C) Both A and B are true statements.
D) None of these are true