Question 1

Major Manuscripts, Inc.is currently operating at maximum capacity.All costs, assets, and current liabilities vary directly with sales.The tax rate and the dividend payout ratio will remain constant.How much additional debt is required if no new equity is raised and sales are projected to increase by 6 percent?

Accepted Answer

A) -$712 
B) -$668 
C) $241 
D) $348 
E) $367

Question 2

Assume that Major Manuscripts, Inc.is currently operating at 97 percent of capacity and that sales are projected to increase to $20,000.What is the projected addition to fixed assets?

Accepted Answer

A) $0 
B) $1,533 
C) $1,629 
D) $1,646 
E) $1,688

Question 3

A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent.The ratio of total assets to sales is constant at 1, and the profit margin is 10 percent.What must the debt-equity ratio be if the firm wishes to keep that ratio constant?

Accepted Answer

A) 0.05 
B) 0.40 
C) 0.55 
D) 0.60 
E) 0.95

Question 4

Which one of the following correctly defines the retention ratio?

Accepted Answer

A) one plus the dividend payout ratio 
B) addition to retained earnings divided by net income 
C) addition to retained earnings divided by dividends paid 
D) net income minus additions to retained earnings 
E) net income minus cash dividends

Question 5

Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of sales?

Accepted Answer

A) 0.70 
B) 0.86 
C) 1.00 
D) 1.06 
E) 1.15

Question 6

Assume that Fake Stone, Inc.is operating at full capacity.Also assume that all costs, net working capital, and fixed assets vary directly with sales.The debt-equity ratio and the dividend payout ratio are constant.What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent?

Accepted Answer

A) $19,800 
B) $21,070 
C) $23,600 
D) $24,240 
E) $26,810

Question 7

Major Manuscripts, Inc.does not want to incur any additional external financing.The dividend payout ratio is constant.What is the firm's maximum rate of growth?

Accepted Answer

A) 8.69 percent 
B) 8.78 percent 
C) 9.26 percent 
D) 9.75 percent 
E) 10.90 percent

Question 8

Financial planning:

Accepted Answer

A) focuses solely on the short-term outlook for a firm. 
B) is a process that firms employ only when major changes to a firm's operations are anticipated. 
C) is a process that firms undergo once every five years. 
D) considers multiple options and scenarios for the next two to five years. 
E) provides minimal benefits for firms that are highly responsive to economic changes.

Question 9

Hungry Howie's is currently operating at full capacity.The profit margin and the dividend payout ratio are held constant.Net working capital and fixed assets vary directly with sales.Sales are projected to increase by 9 percent.What is the external financing needed?

Accepted Answer

A) -$696.50 
B) -$683.60 
C) -$97.20 
D) -$14.50 
E) $26.80

Question 10

Financial planning accomplishes which of the following for a firm?
I.determination of asset requirements
II.development of plans to contend with unexpected events
III.establishment of priorities
IV.analysis of funding options

Accepted Answer

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

Question 11

The Cookie Shoppe expects sales of $437,500 next year.The profit margin is 5.3 percent and the firm has a 30 percent dividend payout ratio.What is the projected increase in retained earnings?

Accepted Answer

A) $16,231 
B) $17,500 
C) $18,300 
D) $20,600 
E) $21,000

Question 12

When utilizing the percentage of sales approach, managers:
I.estimate company sales based on a desired level of net income and the current profit margin.
II.consider only those assets that vary directly with sales.
III.consider the current production capacity level.
IV.can project both net income and net cash flows.

Accepted Answer

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

Question 13

Hungry Howie's is currently operating at 84 percent of capacity.What is the total asset turnover ratio at full capacity?

Accepted Answer

A) .68 
B) .78 
C) .95 
D) 1.29 
E) 1.42

Question 14

Sales can often increase without increasing which one of the following?

Accepted Answer

A) accounts receivable 
B) cost of goods sold 
C) accounts payable 
D) fixed assets 
E) inventory

Question 15

What is the sustainable growth rate assuming the following ratios are constant?

Accepted Answer

A) 10.30 percent 
B) 10.53 percent 
C) 10.67 percent 
D) 10.89 percent 
E) 11.01 percent

Question 16

The financial planning process:
I.involves internal negotiations among divisions.
II.quantifies senior manager's goals.
III.considers only internal factors.
IV.reconciles company activities across divisions.

Accepted Answer

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

Question 17

Which one of the following is correct in relation to pro forma statements?

Accepted Answer

A) Fixed assets must increase if sales are projected to increase. 
B) Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. 
C) The addition to retained earnings is equal to net income plus dividends paid. 
D) Long-term debt varies directly with sales when a firm is currently operating at maximum capacity. 
E) Inventory changes are directly proportional to sales changes.

Question 18

Which of the following are needed to determine the amount of fixed assets required to support each dollar of sales?
I.current amount of fixed assets
II.current sales
III.current level of operating capacity
IV.projected growth rate of sales

Accepted Answer

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

Question 19

Which one of the following statements is correct?

Accepted Answer

A) Pro forma statements must assume that no new equity is issued. 
B) Pro forma statements are projections, not guarantees. 
C) Pro forma statements are limited to a balance sheet and income statement. 
D) Pro forma financial statements must assume that no dividends will be paid. 
E) Net working capital needs are excluded from pro forma computations.

Question 20

Assume that Fake Stone, Inc.is operating at full capacity.Also assume that assets, costs, and current liabilities vary directly with sales.The dividend payout ratio is constant.What is the external financing need if sales increase by 12 percent?

Accepted Answer

A) -$318.09 
B) -$268.49 
C) $103.13 
D) $350.40 
E) $460.56

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