Question 1

The most recent financial statements for Watchtower, Inc.are shown here (assuming no income taxes):  Assets and costs are proportional to sales.Debt and equity are not.No dividends are paid.Next year's sales are projected to be $4,750.What is the amount of the external financing needed?

Accepted Answer

A) $797 
B) $808 
C) $811 
D) $818 
E) $823

Question 2

A) What are the assumptions that underlie the internal growth rate and B) what are the implications of this rate?

Accepted Answer

The answer of A) What are the assumptions that underlie...

Question 3

Country Comfort, Inc.had equity of $150,000 at the beginning of the year.At the end of the year, the company had total assets of $195,000.During the year, the company sold no new equity.Net income for the year was $63,000 and dividends were $44,640.What is the sustainable growth rate?

Accepted Answer

A) 10.32 percent 
B) 10.79 percent 
C) 11.78 percent 
D) 12.01 percent 
E) 12.24 percent

Question 4

The plowback ratio is:

Accepted Answer

A) equal to net income divided by the change in total equity. 
B) the percentage of net income available to the firm to fund future growth. 
C) equal to one minus the retention ratio. 
D) the change in retained earnings divided by the dividends paid. 
E) the dollar increase in net income divided by the dollar increase in sales.

Question 5

What is Major Manuscripts, Inc.'s retention ratio?

Accepted Answer

A) 33 percent 
B) 40 percent 
C) 50 percent 
D) 63 percent 
E) 67 percent

Question 6

You are developing a financial plan for a corporation.Which of the following questions will be considered as you develop this plan?
I.How much net working capital will be needed?
II.Will additional fixed assets be required?
III.Will dividends be paid to shareholders?
IV.How much new debt must be obtained?

Accepted Answer

A) I and IV only 
B) II and III only 
C) I, III, and IV only 
D) II, III, and IV only 
E) I, II, III, and IV

Question 7

Wagner Industrial Motors, which is currently operating at full capacity, has sales of $29,000, current assets of $1,600, current liabilities of $1,200, net fixed assets of $27,500, and a 5 percent profit margin.The firm has no long-term debt and does not plan on acquiring any.The firm does not pay any dividends.Sales are expected to increase by 4.5 percent next year.If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

Accepted Answer

A) -$259.75 
B) -$201.19 
C) $967.30 
D) $1,099.08 
E) $1,515.25

Question 8

A firm's net working capital and all of its expenses vary directly with sales.The firm is operating currently at 96 percent of capacity.The firm wants no additional external financing of any kind.Which one of the following statements related to the firm's pro forma statements for next year must be correct?

Accepted Answer

A) Total liabilities will remain constant at this year's value. 
B) The maximum rate of sales increase is 4 percent. 
C) The firm cannot exceed its internal rate of growth. 
D) The projected owners' equity will equal this year's ending equity balance. 
E) Fixed assets must remain constant at the current level.

Question 9

Assume the profit margin and the payout ratio of Major Manuscripts, Inc.are constant.If sales increase by 9 percent, what is the pro forma retained earnings?

Accepted Answer

A) $5,220.18 
B) $5,721.42 
C) $6,308.50 
D) $6,648.42 
E) $7,028.56

Question 10

Which one of the following terms is defined as dividends paid expressed as a percentage of net income?

Accepted Answer

A) dividend retention ratio 
B) dividend yield 
C) dividend payout ratio 
D) dividend portion 
E) dividend section

Question 11

Fixed Appliance Co.wishes to maintain a growth rate of 8 percent a year, a constant debt-equity ratio of 0.42, and a dividend payout ratio of 50 percent.The ratio of total assets to sales is constant at 1.3.What profit margin must the firm achieve?

Accepted Answer

A) 12.92 percent 
B) 13.46 percent 
C) 13.56 percent 
D) 14.33 percent 
E) 14.74 percent

Question 12

A firm is currently operating at full capacity.Net working capital, costs, and all assets vary directly with sales.The firm does not wish to obtain any additional equity financing.The dividend payout ratio is constant at 40 percent.If the firm has a positive external financing need, that need will be met by:

Accepted Answer

A) accounts payable. 
B) long-term debt. 
C) fixed assets. 
D) retained earnings. 
E) common stock.

Question 13

Stop and Go has a 4.5 percent profit margin and an 18 percent dividend payout ratio.The total asset turnover is 1.6 and the debt-equity ratio is 0.45.What is the sustainable rate of growth?

Accepted Answer

A) 8.13 percent 
B) 8.54 percent 
C) 8.89 percent 
D) 9.26 percent 
E) 9.36 percent

Question 14

Consider the following information for Kaleb's Kickboxing:  What is the sustainable rate of growth?

Accepted Answer

A) 11.87 percent 
B) 12.29 percent 
C) 12.52 percent 
D) 13.42 percent 
E) 13.58 percent

Question 15

The most recent financial statements for Heng Co.are shown here:  Assets and costs are proportional to sales.The company maintains a constant 45 percent dividend payout ratio and a constant debt-equity ratio.What is the maximum increase in sales that can be sustained next year assuming no new equity is issued?

Accepted Answer

A) $4,808.12 
B) $5,211.17 
C) $5,887.48 
D) $5,894.60 
E) $6,666.67

Question 16

Smith & Daughters is getting ready to compile pro forma statements for the next few years.How can the managers establish a reasonable range of growth rates that they should consider during this planning process?

Accepted Answer

The answer of Smith & Daughters is getting ready to...

Question 17

Nelson's Landscaping Services just completed a pro forma statement using the percentage of sales approach.The pro forma has a projected external financing need of -$5,500.What are the firm's options in this case?

Accepted Answer

The answer of Nelson's Landscaping Services just completed a pro...

Question 18

Hungry Howie's maintains a constant payout ratio.The firm is currently operating at full capacity.What is the maximum rate at which the firm can grow without acquiring any additional external financing?

Accepted Answer

A) 9.74 percent 
B) 12.97 percent 
C) 13.06 percent 
D) 13.58 percent 
E) 14.23 percent

Question 19

The most recent financial statements for Benatar Co.are shown here:  Assets and costs are proportional to sales.Debt and equity are not.The company maintains a constant 40 percent dividend payout ratio.No external equity financing is possible.What is the internal growth rate?

Accepted Answer

A) 2.91 percent 
B) 3.44 percent 
C) 3.87 percent 
D) 4.02 percent 
E) 4.14 percent

Question 20

Sal's Pizza has a dividend payout ratio of 10 percent.The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy.The firm is profitable.Which one of the following defines the maximum rate at which this firm can grow?

Accepted Answer

A) internal growth rate × (1 - 0.10) 
B) sustainable growth rate × (1 - 0.10) 
C) internal growth rate 
D) sustainable growth rate 
E) zero percent

Exam 4: Introduction to Valuation: the Time Value of Money

The most recent financial statements for Watchtower, Inc.are shown here (assuming no income taxes) : Assets and costs are proportional to sales.Debt and equity are not.No dividends are paid.Next year's sales are projected to be $4,750.What is the amount of the external financing needed?