Chapter 04

Chapter 4 Long-Term Long-Term Financial Planning and Corporate Growt h

1. Financial planning helps investigate the linkages between between goals and the the different aspects of a firms b!siness. "ns# Tr!e

Level# $asic

%!b&ect# Financial Planning 'odels

T(pe# T(pe# Concepts

). Financial planning is important beca!se the onl( onl( wa( for a firm to prosper prosper is for it to grow. grow. "ns# False

Level# $asic

%!b&ect# Financial Planning


*. Conventional wisdom holds holds that financial plans dont work+ b!t financial financial planning does. does. "ns# Tr!e

Level# $asic

%!b&ect# Financial 'anagement Goals


4. ,ith good financial planning+ planning+ managers can be less vigilant in their da( to da( management of the firm. "ns# False

Level# $asic



. The firms investment and and financing decisions are !nrelated and sho!ld not be be anal(ed at the same time. "ns# False

Level# $asic

%!b&ect# /ecision 'aking


0. There are no direct connections connections between the growth that a compan( compan( can achieve and the financial financial policies !ndertaken b( the financial managers. "ns# False

Level# $asic

%!b&ect# ario!s ario!s %tatements


2. 3n most ind!stries+ planning planning be(ond the period period of one (ear is not ver( !sef!l. "ns# False

Level# $asic

%!b&ect# Planning orion


5. "ggregation refers to the process b( which a firm firm first pro&ects its aggregate investment re6!irement+ re6!irement+ then it breaks that total !p and allocates it to the investment proposals of the firms smaller !nits. "ns# False

Level# $asic

%!b&ect# "ggregation


7. er( er( few financial planning planning models re6!ire an e8ternall( s!pplied sales forecast. forecast. "ns# False

Level# $asic

%!b&ect# Planning 'odels


19. :ne wo!ld e8pect the capital intensit( ratio of an a!to man!fact!ring man!fact!ring firm to be lower than that of a software development firm. "ns# False

Level# $asic

%!b&ect# Capital 3ntensit(


11. "n increase in a firms capital capital intensit( ratio implies a decrease in how efficientl( efficientl( it !ses its assets to generate sales. "ns# Tr!e

Level# $asic



Cop(right ; )99 'cGraw-ill <(erson Limited.

Page 1


1). "ll else e6!al+ the lower the forecast forecast growth the larger larger the level of e8ternal financing needed. needed. "ns# False

Level# $asic

%!b&ect# =8ternal Financing >eeded


1*. Generall( speaking+ actions that increase the firms abilit( to generate f!nds internall( decrease decrease its abilit( to grow witho!t obtaining e8ternal financing. "ns# False

Level# $asic



14. "ll else e6!al+ an increase in a firms capital intensit( ratio will increase its e8ternal e8ternal financing needed. "ns# Tr!e

Level# $asic



1. "ll else e6!al+ a firm that !tilies assets inefficientl( inefficientl( will have a higher s!stainable growth rate than a firm that does not. "ns# False

Level# $asic

%!b&ect# %!stainable Growth

10. The long-range time period+ !s!all( the ne8t two to five (ears+ over which the financial planning process foc!ses is known as the# "? Planning ho horion. $? Plan lanning ing stra trateg(. g(. C? Planning agenda. /? %hort r!n. =? C!rr C!rreent fina inancin ncing g pe period. iod. "ns# "

Level# $asic


T(pe# T(pe# /efinitions

12. The process b( which smaller smaller investment proposals of each of a firms operational !nits are added !p and treated as one big pro&ect is known as# "? %eparation. $? "ggregation. C? Conglomeration. /? "ppropriation. =? %triation. "ns# $

Level# $asic

%!b&ect# "ggregation


15. Pro forma forma financial financial statements statements are# are# "? 3llegal. $? "cco!n "cco!nting ting state statemen ments ts filed filed with with the %ec! %ec!rit rities ies and and =8cha =8change nge Commi Commissi ssion on @%=C? @%=C? . C? "cco "cco!n !ntin ting g stat statem emen ents ts file filed d with with CC<" CC<".. /? Pro&ections Pro&ections in the the form form of acco! acco!nting nting statements+ statements+ based on a sales forecast forecast ass!mption. ass!mption. =? The mostmost-rec recent entl( l( compile compiled d acco!n acco!nting ting stat stateme ements nts of the the firm rele release ased d to the p!blic p!blic.. "ns# /

Level# $asic

%!b&ect# Pro Forma %tatements



Page )


17. The designated so!rce@s? of e8ternal financing re6!ired re6!ired to make the pro forma balance balance sheet balance is called the# "?
Level# $asic

%!b&ect# Pl!g ariable ariable


)9. The financial planning method in which acco!nts acco!nts are varied depending on a firms predicted sales level level is called the# "? Perc Percen enta tage ge of sale saless app appro roac ach. h. $? %ale %aless dil!t il!tio ion n appr pproach oach.. C? %ale %aless rec recon onci cili liat atio ion n app appro roac ach. h. /? Comm Common on--sie sie appr approa oacch. =? Time-tre trend ap approac oach. "ns# "

Level# $asic

%!b&ect# Percentage :f %ales


)1. The dividend dividend pa(o!t financial financial ratio is calc!lated calc!lated as# "? >et >et incom incomee min!s min!s add additi ition onss to ret retai aine ned d earn earning ings. s. $? Cash Cash div divide idend ndss divid divided ed b( b( shar shares es o!t o!tst stan andin ding. g. C? Cash Cash div divid iden ends ds div divid ided ed b( b( net net inco income me.. /? >et >et inco income me min! min!ss cas cash h div divid iden ends ds.. =? :ne :ne pl! pl!ss th the ret reten enti tio on rat ratio io.. "ns# C

Level# $asic

%!b&ect# /ividend Pa(o!t

)). The retention retention ratio ratio is calc!lated calc!lated as# as# "? :ne :ne pl! pl!ss the the div divid iden end d pa( pa(o! o!tt rati ratio. o. $? "ddi "dditio tions ns to to reta retaine ined d earn earning ingss divide divided d b( net net incom income. e. C? "dditio "dditions ns to reta retained ined earnin earnings gs divi divided ded b( shar shares es o!ts o!tstan tanding ding.. /? >et >et incom incomee min!s min!s add additi ition onss to ret retai aine ned d earn earning ings. s. =? >et >et inc incom omee min min!s !s cash cash divi divide dend nds. s. "ns# $

Level# $asic

%!b&ect#

)*. The reten retention tion ratio ratio 3. is e6!al to one pl!s the dividend pa(o!t pa(o!t ratio. 33. is also known as the plowback ratio. 333. is a meas!re of a firms willingness to provide internal f!nds for for f!t!re growth. "? 3 onl( $? 333 onl( C? 3 and 33 onl( /? 33 and 333 onl( =? 3+ 33+ and 333 "ns# /

Level# $asic

%!b&ect#


Page *


)4. The capital capital intensit( intensit( ratio is calc!lated calc!lated as# as# "? Long Long-t -ter erm m debt debt tim times es tota totall asse assets ts.. $? >et >et fi8e fi8ed d ass asset etss divi divide ded d b( b( cre credi ditt sal sales es.. C? >et >et fi8 fi8ed ed asse assets ts time timess tot total al sale sales. s. /? Total asse assets ts divid divided ed b( tota totall sal sales es.. =? Total tal sal sales es divi divide ded d b( tota totall asse assets ts.. "ns# /

Level# $asic


). The AAAAAAAAA is the amo!nt of assets assets needed to generate B1 in sales. "? capit apitaal inte inten nsit( sit( rati ratio o $? fi8e fi8edd-as asse sett !til !tili iat atio ion n rati ratio o C? internal growth rate /? plowback ratio =? long long-t -teerm solv solven enc( c( ratio atio "ns# "

Level# $asic


)0. The internal internal growth growth rate of a firm is best describ described ed as# "? The mini minim!m m!m growt growth h rate rate achiev achievabl ablee if the firm firm does does not not pa( o!t o!t an( cash cash divide dividends nds.. $? The minim minim!m !m growth growth rate rate achiev achievabl ablee if the firm firm mainta maintains ins a const constant ant e6!it( e6!it( m!ltip m!ltiplie lier. r. C? The ma8i ma8im!m m!m grow growth th rate rate achie achievab vable le witho witho!t !t e8ter e8ternal nal fina financi ncing ng of an( kind. kind. /? The ma8im!m ma8im!m growth growth rate achievable achievable witho!t witho!t !sing !sing an( an( e8terna e8ternall e6!it( e6!it( financi financing+ ng+ while while maintaining a constant debt-e6!it( ratio. =? The ma8im! ma8im!m m growth growth rate rate achieva achievable ble witho witho!t !t an( limits limits on on the amo!n amo!ntt of debt fina financi ncing ng !sed. !sed. "ns# C

Level# $asic

%!b&ect# 3nternal Growth

)2. "ll else e6!al+ an increase in a firms dividend pa(o!t ratio ratio will decrease its AAAAAAAAAA. 3. s!stainable growth rate 33. internal growth rate 333. e8ternal financing needed needed "? 3 onl( $? 33 onl( C? 3 and 33 onl( /? 3 and 333 onl( =? 33 and 333 onl( "ns# C

Level# $asic


)5. The s!stainable growth rate of a firm firm is best best described as# "? The mini minim!m m!m growt growth h rate rate achiev achievabl ablee if the firm firm does does not not pa( o!t o!t an( cash cash divide dividends nds.. $? The minim minim!m !m growth growth rate rate achiev achievabl ablee if the firm firm mainta maintains ins a const constant ant e6!it( e6!it( m!ltip m!ltiplie lier. r. C? The ma8i ma8im!m m!m grow growth th rate rate achie achievab vable le witho witho!t !t e8ter e8ternal nal fina financi ncing ng of an( kind. kind. /? The ma8im!m ma8im!m growth growth rate achievable achievable witho!t witho!t !sing !sing an( an( e8terna e8ternall e6!it( e6!it( financi financing+ ng+ while while maintaining a constant debt-e6!it( ratio. =? The ma8im! ma8im!m m growth growth rate rate achieva achievable ble witho witho!t !t an( limits limits on on the amo!n amo!ntt of debt fina financi ncing ng !sed. !sed. "ns# /

Level# $asic



Page 4


)7. 3f a firm wants to maintain its c!rrent c!rrent ratio of debt to e6!it(+ e6!it(+ its c!rrent dividend pa(o!t pa(o!t ratio+ and does not want to sell an( new e6!it(+ the firms growth rate in sales and assets m!st be less than or e6!al to its "? divide idend pa pa(o!t o!t ra ratio tio $? retention ratio C? s!s s!stain tainaable ble grow growth th rate rate /? grow growth th rate rate with with no e8te e8tern rnal al fina financ ncing ing =? pro& pro&eected ted sa sales les gro growt wth h rat ratee "ns# C

Level# $asic


*9. ,hen pro&ecting growth+ the point where the re6!ired increase in assets assets is e6!al to the addition to retained earnings is called the# "? =6!i =6!ili lib bri!m ri!m growt rowth h ra rate. te. $? =8te 8ternal gr growth owth rate. C? 3nter ternal nal gr growth rate. te. /? %!sta !stain inab able le growt rowth h ra rate. te. =? Pro-forma gr growth rate. te. "ns# C

Level# $asic


*1. The two ke( dimensions dimensions of financi financial al planning planning are# "? Capi Capita tall b!dg b!dget eting ing and and cap capita itall str str!c !ct! t!re re.. $? The The gro growt wth h rate rate and and div divid iden end d poli polic( c(.. C? The The plan plannin ning g hori horio on n and and aggr aggreg egat ation ion.. /? "ggr "ggreg egat atio ion n and and capi capita tall str!c str!ct! t!re re.. =? The growth growth rate rate and and the the marke markett val!e val!e of shar shareho eholde lders rs e6!it( e6!it(.. "ns# C

Level# $asic

%!b&ect# Financial Planning /imensions


*). " pro&ection !sing the most optimistic optimistic ass!mptions is called a@n?# "? Foc!sed pro&ection ion. $? $ase case scenario. io. C? Li6! i6!idit idit( ( ba based sed pro pro--forma orma.. /? $est case scenario. io. =? "ggr "ggreg egat ateed fin finan anci cial al plan plan.. "ns# /

Level# $asic

%!b&ect# $est Case %cenario


**. /etermining the amo!nt of li6!idit( needed b( a firm is referred referred to as the# "? Capi Capita tall b!dg b!dget etin ing g deci decisi sion on.. $? Capi Capita tall str str!c !ct! t!re re poli polic( c(.. C? ,orking king capi capita tall deci decisi sion on.. /? "ggr "ggreg egat atio ion n pla plann nnin ing g dec decis isio ion. n. =? Fina inancin ncing g po polic( lic( dec decisio ision. n. "ns# C

Level# $asic

%!b&ect# ,orking ,orking Capital /ecision



Page 


*4. The o!tp!ts o!tp!ts of a financial financial planning planning model are called# called# "? "ggr "ggreg egat ateed state tateme ment nts. s. $? Plan Planni ning ng hori horio on n stat statem emen ents ts.. C? Pro& Pro&ec ecte ted d sta state teme ment ntss of posi positi tion on.. /? ,orking rking capit capital al sta statem temen ents ts of of pos posit ition ion.. =? Pro-forma st statements. ts. "ns# =

Level# $asic

%!b&ect# Pro-Forma %tatements


*. The retention retention ratio ratio is also called the AAAAA AAAAA ratio. ratio. "? Plowback $? =arnings held C? /ividends pa(abl e /? et income "ns# "

Level# $asic

%!b&ect#

*0. Total assets divided b( sales is called the AAAAA ratio. "? Capital in intensit( $?
Level# $asic


*2. The s!stainab s!stainable le growth growth rate is defined defined as# as# 3 =8cl!ding additional e6!it( financing. 33 =8cl!ding an( kind of e8ternal financing. 333 3ncl!ding a variable debt-e6!it( ratio. 3 3ncl!ding a constant debt-e6!it( ratio. "? 33 onl(. $? 3 and 333 onl(. C? 33 and 333 onl(. /? 3 and 3 onl(. =? 33 and 3 onl(. "ns# /

Level# $asic


*5. The internal internal growth growth rate is defined defined as# as# "? @<: @<:"? "?@< @
Level# $asic



Page 0


*7. The dividend dividend pa(o!t ratio ratio is defined as cash dividends dividends divided divided b(# "? %ales. $? >et income. C? Total as assets. /?
Level# $asic


49. ,hen a firm chooses to b!( new fi8ed assets it is making a AAAAAAAAAAAAAA decision. "? capital b! b!dgeting $? capital str!ct!re C? financing /? working ca capital =? dividend polic( "ns# "

Level# $asic

%!b&ect# Capital $!dgeting


41. ,hen a firm makes decisions regarding regarding its investment in inventor( and acco!nts acco!nts receivable it is making a AAAAAAAAAAAAAAAA decision. "? capital b! b!dgeting $? capital str!ct!re C? financing /? working ca capital =? dividend polic( "ns# /

Level# $asic

%!b&ect# ,orking ,orking Capital


4). man Corp. has &!st decided to lower its amo!nt of debt debt o!tstanding+ replacing replacing it with the proceeds from a new e6!it( iss!e. This ad&!stment is a AAAAAAAAAAAAAAAAAA decision. "? capital b! b!dgeting $? capital str!ct!re C? financing /? working ca capital =? dividend polic( "ns# $

Level# $asic

%!b&ect# Capital %tr!ct!re


4*. ,hich of the following is a basic polic( element of financial planningH 3. The capital capital b!dgeting decision 33. The dividend polic( decision 333. The net working capital decision decision "? 3 onl( $? 33 onl( C? 3 and 33 onl( /? 33 and 333 onl( =? 3+ 33+ and 333 "ns# =

Level# $asic




Page 2


44. ,hich of the following is >:T a basic polic( element of financial planningH "? The The firm firmss need needed ed inv inves estme tment nt in new new fi8 fi8ed ed ass asset ets. s. $? The degree degree of financ financial ial levera leverage ge a firm firm choos chooses es to to emplo emplo( (. C? The amo! amo!nt nt of cash cash the firm firm think thinkss is necess necessar( ar( and and appro appropria priate te to pa( shar shareho eholder lders. s. /? The level level of sales sales grow growth th the the marke markett will will provi provide de in in f!t!r f!t!ree (ears (ears.. =? The amo! amo!nt nt of li6! li6!idit( idit( and work working ing capi capital tal the the firm firm needs needs on on an ongo ongoing ing basi basis. s. "ns# /

Level# $asic



4. ,hich of the following is the first first dimension of the financial planning processH processH "? =sta =stabl blis ish h a plan planni ning ng hori horio on. n. $? %et a divi ividend po polic( ic(. C? "ggr "ggreg egate ate the the fir firm mss inv inves estme tment nt pro& pro&ec ects ts.. /? Create Create alte alterna rnative tive sets sets of of ass!m ass!mptio ptions ns abo! abo!tt import important ant vari variabl ables. es. =? Cons Constr tr!c !ctt pro pro form formaa fin finan anci cial al stat stateme ements nts.. "ns# "

Level# $asic



40. For financial planning p!rposes+ we generall( define the short r!n as AAAAAAAAAAA+ and the long r!n r!n as AAAAAAAAAAAA. "? ) (earsI *- (ears $? 1 (earI ))-0 (ears C? 1 (earI ))- (ears /? ) (earsI *-0 (ears =? 1 (e (earsI ))-4 (e (ears "ns# C

Level# $asic



42. ,hich of the following statements statements abo!t financial financial planning is >:T correctH "? Financial Financial plannin planning g provides provides a poor poor wa( of checkin checking g that that the goals and plans plans made with regard regard to specific areas of a firms operations are feasible and internall ( consistent. $? The financi financial al plan plan provides provides the opport! opport!nit( nit( for for the the firm firm to develop develop++ anal(e+ anal(e+ and compare compare man( different scenarios in a consistent wa(. C? " financial financial plan makes makes e8plicit e8plicit the consistenc( consistenc( between between planned planned growth and stated stated financial financial policies policies.. /? :ne of of the p!rposes p!rposes of of financi financial al planning planning is to avoid s!rprises s!rprises and and develop develop contingenc( contingenc( plans. plans. =? Growth+ Growth+ b( itself itself++ is not not an appr appropr opriat iatee goal goal for the fina financi ncial al manag manager er.. "ns# "

Level# $asic



45. ,hich of the following statements statements regarding financial planning is acc!rateH "? Financial Financial planning planning ins!res ins!res a firm firm will will not be s!rpri s!rprised sed b( !nfore !nforeseen seen f!t!re f!t!re events. events. $? $( !sing !sing financia financiall planning+ planning+ a firm firm can can clearl( clearl( identif( identif( its options options for the coming coming fifteen fifteen (ears. (ears. C? The !se !se of financial financial plannin planning g allows allows a firm to eliminate eliminate the interac interactions tions between between its operating operating policies and its financing policies. /? Financ Financial ial plann planning ing allow allowss a firm firm to plan plan for the the f!t!r f!t!ree in a s(stem s(stematic atic fash fashion ion.. =? Financial Financial plannin planning g takes takes the the b!rden b!rden off off the financi financial al manager manager and places places it on the operati operations ons manager who m!st carr( o!t the plan as laid o!t. "ns# /

Level# $asic




Page 5


47. ,hen a firm !ses a financial plan to develop+ anal(e+ and compare compare vario!s scenarios scenarios in a consistent wa(+ wa(+ the firm benefits b( better !nderstanding# "? The inte interac raction tionss of its its opera operation tionss and change changess in inter interest est rate rates. s. $? The linkage linkagess b betw etween een diffe differen rentt inve investme stment nt propos proposals als.. C? The The e8p e8pec ecte ted d f!t! f!t!re re stat statee of of the the econ econom( om(.. /? The feasib feasibilit( ilit( of its its past past capita capitall b!dge b!dgeting ting decisio decisions. ns. =? The The relia reliabi bilit lit( ( of of its its empl emplo( o(ee eess and and mana manage gemen ment. t. "ns# $

Level# $asic



9. $( developing a financial financial plan a firm firm benefits b( being forced to# 3. Think abo!t and forecast the f!t!re. f!t!re. 33. Foc!s on best case scenarios. 333. %et goals and establish priorities. "? 3 onl( $? 3 and 33 onl( C? 3 and 333 onl( /? 33 and 333 onl( =? 3+ 33+ and 333 "ns# C

Level# $asic

%!b&ect# Financial Plan $enefits


1. ,hich of the following does does >:T correctl( complete this sentence. JThe benefits of financial planning incl!de AAAAAAAAAAAAAAAAAAA.J "? making making clear clear the the linkage linkagess between between inves investmen tmentt proposa proposals ls and fina financin ncing g needs needs $? avoidin avoiding g s!rpri s!rprises ses and develo developing ping conting contingenc enc( ( plans plans C? elimina eliminating ting interna internall consis consistenc tenc( ( of goals goals acr across oss firm firm divi divisio sions ns /? provid providing ing for for the the e8plor e8plorati ation on of var vario!s io!s inve investme stment nt and and financ financing ing optio options ns =? !nders !nd erstan tanding ding the impa impact ct sale saless growth growth will have have on fina financi ncing ng need needss "ns# C

Level# $asic



). $ased on (o!r financial plan+ it is likel( that (o!r firm will be !nable to sell all of the !nits of (o!r prod!ct prod!ced over the planning horion. This s!ggests a need to make changes in "? capit apitaal str str!c !ct! t!re re poli polic( c( $? dividend polic( C? net net work workin ing g capi capita tall deci decisi sion onss /? capi capita tall b!dg b!dget etin ing g deci decisi sion onss =? wage polic( ic( decisio ision ns "ns# /

Level# $asic




Page 7


*. ,hich of the following is a common element among financial financial planning modelsH modelsH 3. "sset re6!irements 33. Pro forma statements 333. %ales forecasts "? 3 onl( $? 33 and 333 onl( C? 3 and 33 onl( /? 3 and 333 onl( =? 3+ 33+ and 333 "ns# =

Level# 3ntermediate



4. " financial financial plan sho!ld contain AAAAAAAAAAAAAA which provide provide a model of the firms asset asset str!ct!re for the (ears to come. "? pro pro for forma ma sales ales forec orecaasts sts $? pro pro for forma ma inco income me state tateme ment ntss C? pro pro for forma ma fina financ ncia iall re6 re6!i !ire reme ment ntss /? pro pro for forma bala balanc ncee sheet heetss =? com ommo monn-si sie e bala balanc ncee she sheet etss "ns# /

Level# 3ntermediate

%!b&ect# Pro Forma $alance %heet


. ,hich of the following can be comp!ted directl( from a pro forma balance sheetH "? C!rrent ratio $? 3nven ventor tor( t!rnover C? Profit margin /? "ddi "dditi tion onss to net net fi8e fi8ed d asse assets ts =? 3nterval me meas!re "ns# "

Level# 3ntermediate

%!b&ect# Pro Forma $alance %heet


0. 3n a financial plan+ the AAAAAAAAAAAAA AAAAAAAAAAAAA of a firm provide a g!ide for changes in liabilities and capital. capital. "? sale saless gr growth owth e8p e8peectat ctatio ion ns $? fina financ ncin ing g and and divi divide dend nd poli polici cies es C? s!st s!stai aina nable ble grow growth th rate rate e8pe e8pect ctat ation ionss /? pro pro for forma ma inc inco ome sta state teme ment ntss =? wor workin king capit apital al polic olicie iess "ns# $

Level# 3ntermediate

%!b&ect# Financial Plan


2. The AAAAAAAAA portion portion of a firms firms financial plan contains contains the firms dividend and debt policies. "? sales forecast $? asset re re6!irement C? fina inancia nciall re6! e6!irem iremeents nts /? capital b! b!dgeting =? li6!idit( needs "ns# C

Level# $asic

%!b&ect# Financial


Page 19


5. The Jpl!gJ Jpl!gJ fig!re in a financial financial plan plan represents represents the# the# "? 3ncrea 3ncrease se in in asset assetss neces necessar sar( ( to s!p s!ppor portt pro&e pro&ecte cted d sales sales.. $? =8tern =8ternal al fina financi ncing ng needed needed to s!pp s!pport ort the financ financial ial plan. plan. C? Change Change in reta retaine ined d earni earning ngss attrib attrib!ta !table ble to pro& pro&ect ected ed sale sales. s. /? Level Level of of new new fi8ed fi8ed assets assets contai contained ned in the the fina financi ncial al plan plan.. =? Level Level of divi dividen dends ds the the firm firm has has paid paid over over rece recent nt (ear (ears. s. "ns# $

Level# $asic



7. 3n creating pro forma statements+ if we ass!me that costs+ costs+ assets+ and short-term debt var( directl( with changes in sales+ that the pa(o!t ratio is fi8ed+ and that the change in long-term debt onl( res!lts from pa(ments made as re6!ired on the debt contracts+ then the Jpl!gJ re6!ired for the balance sheet to balance will probabl( be# "? /ividends. $? Total debt. C? Long-term de debt. /? >ew e6!it ( sales. =?
Level# 3ntermediate

%!b&ect# Pl!g ariables ariables


09. The percentage of sales approach to financial planning re6!ires# "? "ll asse assets ts and and liab liabilit ilities ies change change at the the same same rate rate as sales. sales. $? The divide dividend nd polic( polic( remain remain !nchan !nchanged ged from from (ear (ear to (ear. (ear. C? The The fir firm m be be ope opera ratin ting g at at f!ll f!ll capa capaci cit( t(.. /? %epara %eparating ting acco!n acco!nts ts into into those those that that var( var( with sale saless and and those those that that do not. not. =? The The fir firm mss ssal ales es to incr increa ease se each each (ear (ear.. "ns# /

Level# $asic



01. 3f total assets increase b( the same percentage as sales increase+ increase+ 3. it is likel( assets and sales will increase increase b( identical dollar amo!nts. 33. the larger the increase increase in sales+ the more likel( there will be a need for e8ternal financing. financing. 333. the firm is ass!med to be operating operating at f!ll capacit(. "? 3 onl( $? 333 onl( C? 3 and 333 onl( /? 33 and 333 onl( =? 3+ 33+ and 333 "ns# /

Level# 3ntermediate



0). "ss!me (lon+ 3nc. is c!rrentl( c!rrentl( operating at less than f!ll capacit(. ,hich of the following wo!ld be L="%T likel( to var( directl( with salesH "? >otes pa(able $? "cco!nts receiva ivable C? "cco!nts pa(able /? 3nventor( =? Cash "ns# "

Level# 3ntermediate




Page 11


0*. 3f we ass!me for forecasting forecasting p!rposes that the firms firms fi8ed assets will increase directl( directl( with sales+ we are effectivel( ass!ming that the firm# "? as as n no o !n! !n!se sed d capa capaci cit( t( in in its its fi8e fi8ed d ass asset ets. s. $? 3s c!r c!rre rentl ntl( ( !til !tili iing ing its c!rr c!rren entt asse assets ts at at 199K. 199K. C? 3s prod prod!c !cin ing g more more goo goods ds tha than n it sel sells ls.. /? as as n no o e8c e8ces esss wor worki king ng capi capita tal. l. =? Can increa increase se prod prod!ct !ction ion witho!t witho!t an( e8tern e8ternal al fina financi ncing ng need needed. ed. "ns# "

Level# $asic



04. The Limberger 3nstit!te is c!rrentl( c!rrentl( operating at f!ll capacit(. capacit(. ,hich balance sheet items wo!ld most likel( var( directl( with salesH 3. Fi8ed assets 33. Long-term debt 333. "cco!nts receivable "? 3 onl( $? 33 onl( C? 3 and 333 onl( /? 33 and 333 onl( =? 3+ 33+ and 333 "ns# C

Level# $asic



0. "ll else the same+ a firms capital intensit( ratio will increase if AAAAAAAAAAAAAAAAAA. "? acco! cco!n nts pa( pa(ab able le dec decrrease ase $? net inc income inc increases C? sales decrease /? assets decrease =? cost ost of of good goodss sso old inc increase ease "ns# C

Level# $asic


00. "ss!me a firm is c!rrentl( operating at f!ll capacit(. capacit(. %ales are forecast forecast to increase b( )9K ne8t ne8t (ear. 'anagement co!ld do each of the followin g =C=PT# "? "ttempt "ttempt to to restr restrain ain sale saless growth growth so so that that no new new fi8ed fi8ed asse assets ts are are needed needed.. $? 3ncrea 3ncrease se the the firms firms inve investme stment nt in fi8e fi8ed d assets assets to to meet meet the adde added d demand demand.. C? %!bcontract %!bcontract with other man!fact!r man!fact!rers ers to increas increasee prod!cti prod!ction on and and meet meet the the added added demand. demand. /? Lease Lease additio additional nal e6!ipme e6!ipment nt to meet meet the the adde added d dema demand. nd. =? "c6!ir "c6!iree more more c!rren c!rrentt asset assetss in order order to to meet meet the the added added dema demand. nd. "ns# =

Level# 3ntermediate

%!b&ect# Firm Capacit(



Page 1)


02. "ll else the same+ which of the following following wo!ld likel( be associated associated with a firm which has a high capital intensit( ratio+ relative to other firms in the same ind!str(H 3. Lower fi8ed asset t!rnover ratio 33. Lower ret!rn on assets @<:"? ratio ratio 333. Greater depreciation e8pense "? 3 and 33 onl( $? 33 onl( C? 3 and 333 onl( /? 33 and 333 onl( =? 3+ 33+ and 333 "ns# =

Level# 3ntermediate


05. "ll else the same+ the level of e8ternal e8ternal financing needed @=F>? increases with increases in the# "? Profit margin. $?
Level# 3ntermediate



07. %!ppose a firm is working at f!ll f!ll capacit( and that that assets+ costs+ and and all liabilities are tied directl( to the level of sales. 3n addition+ the firm pa(s o!t all its earnings as dividends+ and sales are e8pected to increase b( 19K ne8t period. The firm is financed half with e6!it( and half with debt. The e8ternal financing needed to s!pport this growth# "? 3s ero ero since since all all liabili liabilitie tiess are are tied tied direc directl( tl( to to the level level of sales. sales. $? /epe /epend ndss on the the prof profit it marg margin in.. C? 3s e6!a e6!all to hal halff the the dolla dollarr incr increa ease se in in ass asset ets. s. /? 3s e6!al e6!al to to twic twicee the the dollar dollar increa increase se in liabili liabilitie ties. s. =? 3s e6!a e6!all to the the gro growt wth h rat ratee time timess tota totall asse assets ts.. "ns# C

Level# Challenge



29. %ales growth growth AAAAAA AAAAAAAAAAAA AAAAAAAAAAA AAAAA.. "? will will t(pic t(pical all( l( lea lead d to grow growth th in in c!rr c!rren entt asse assets ts $? will will a!to a!tomati matical call( l( lea lead d to to incr increas eases es in long-te long-term rm debt debt C? is the the least least impor importan tantt item to forec forecast ast in in the fina financi ncial al plann planning ing proc process ess /? will re6!ir re6!iree additions additions to net net fi8ed fi8ed assets assets for firms operating operating at at less less than than f!ll f!ll capacit( capacit( =? of less less than than 19K will make make =F> =F> negat negative ive++ crea creating ting a s!rp s!rpl!s l!s "ns# "

Level# 3ntermediate

%!b&ect# =F> "nd %ales Growth


21. 3f (o!r firm is c!rrentl( c!rrentl( operating at f!ll capacit( and (o! (o! e8pect strong sales growth over over the ne8t few (ears+ (o! sho!ld most likel(# likel (# "? =8pe =8pect ct that that asse assets ts will will not not gro grow w. $?
Level# 3ntermediate

%!b&ect# %ales Growth



Page 1*


2). ,h( is it important important to determine determine if a firm is operating operating at f!ll capacit( capacit( or notH notH "? $eca!se $eca!se a firm that that is operating operating at at less than f!ll capacit( capacit( will not not need need an( e8ternal e8ternal financin financing. g. $? $eca!se $eca!se in a firm that that is opera operating ting at less than than f!ll f!ll capacit( capacit(++ fi8ed fi8ed assets assets will t(picall( t(picall( increa increase se at the the same percent as sales. C? $eca!se $eca!se a firm with e8cess e8cess capacit( capacit( has some room to e8pand e8pand sales witho!t increasing increasing the investment in fi8ed assets. /? $eca!se+ $eca!se+ for for a given given increase increase in sales+ sales+ firms firms operating operating at less less than f!ll capacit( capacit( will e8perie e8perience nce more more rapid asset growth than firms that do operate at f!ll capacit(. =? $eca!s $eca!see onl( onl( firms firms oper operati ating ng at at f!ll f!ll capa capacit( cit( can grow grow rapid rapidl( l(.. "ns# C

Level# 3ntermediate

%!b&ect# Capacit( sage


2*. Mo! Mo! wish to comp!te a firms internal growth rate from its acco!nting statements. To do so+ (o! co!ld !se the val!es of "? tota totall asse assets+ ts+ net net inc incom ome+ e+ and and the the ret reten entio tion n ratio ratio $? c!rren c!rrentt asse assets+ ts+ interes interestt paid paid++ and and stockh stockhold olders ers e6!i e6!it( t( C? net net incom income+ e+ e6! e6!it( it(++ and and the the div divide idend nd pa( pa(o! o!tt ratio ratio /? c!rren c!rrentt liab liabilit ilities ies++ fi8e fi8ed d assets assets++ and and total total asse assets ts =? net net inco income me++ e6! e6!it it( (+ and and tot total al asse assets ts "ns# "

Level# 3ntermediate


24. Choose the most complete complete definition of the JbestJ financial plan for a firm. firm. "? The plan plan that that res! res!lts lts in the lowe lowest st level level of of e8ter e8ternal nal fina financi ncing ng neede needed d $? The plan plan that that incorpor incorporates ates the firms firms long range policies policies while while maintainin maintaining g sales sales growth growth at at or below the s!stainable growth rate C? The plan plan which which address addresses es the firms long range range policies policies and whose foc!s is to increa increase se sharehold shareholder er wealth /? The plan plan that that res!lts res!lts in the largest largest sales sales growth each (ear while maintai maintaining ning e8terna e8ternall financing financing needed at or near ero =? The plan plan that that is the simples simplestt to !se !se (et (et is comple8 comple8 eno!gh eno!gh to cover ever( poss possible ible state state of of nat!re nat!re that that might occ!r "ns# C

Level# 3ntermediate

%!b&ect# Financial Plan


2. "ll else the same+ s!stainable growth will decrease decrease with increases in AAAAAAAAAAAAA. "? earning ings retention ion $? net income C? total asset t!r t!rnover /? profit ma margin =? total e6!it( "ns# =

Level# 3ntermediate


20. ,hich of the following is a factor in calc!lating s!stainable s!stainable growthH "? C!rrent ratio $? Profit margin C? 3nven ventor tor( t!rnover /? Cash ratio =? Cash co coverage ra ratio "ns# $

Level# 3ntermediate




Page 14


22. ,hich of the following is >:T a determinant of the s!stainable growth rateH "? 3nven ventor tor( t!rnover $? Profit margin C? /ebt-e6!it ( ratio /? Total tal as asset t! t!rnover =? /ivid ivideend pa(o a(o!t ratio tio "ns# "

Level# 3ntermediate


25. The s!stainable s!stainable growth growth rate depends depends on all of the following =C=PT =C=PT "? The The fir firm mss abi abilit lit( ( to to t!r t!rn n sale saless into into inc income ome $? The firms firms pro&ec pro&ection tionss of of e8pect e8pected ed divide dividend nd pa(o!ts pa(o!ts C? The degree degree of financ financial ial levera leverage ge a firm firm e8pect e8pectss to !tilie !tilie /? The The leve levell of new new asse assets ts re6 re6!i !ire red d as as sale saless grow grow =? The The firm firmss ratio ratio of of acco acco!n !nts ts rec recei eiva vable ble to to inve invent ntor( or( "ns# =

Level# 3ntermediate


27. The determinants determinants of growth growth incl!de which which of the followingH followingH 3. =6!it( m!ltiplier 33. Profit margin 333. Total Total asset t!rnover t!rnover "? 3 onl( $? 33 onl( C? 33 and 333 onl( /? 3 and 333 =? 3+ 33+ and 333 "ns# =

Level# 3ntermediate

%!b&ect# Growth Factors


59. "ll else the same+ an increase in a firms dividend pa(o!t ratio will decrease decrease its# 3. %!stainable growth rate. 33. 3nternal growth rate. 333. =8ternal financing financing needed. needed. "? 3 onl( $? 33 onl( C? 3 and 33 onl( /? 3 and 333 onl( =? 33 and 333 onl( "ns# C

Level# 3ntermediate

%!b&ect# Growth


Page 1


51. 3f a firm believes its costs and assets grow at the same same rate as sales+ the dividend pa(o!t pa(o!t ratio is fi8ed+ no new e6!it( is possible+ and the c!rrent debt-e6!it( ratio is optimal+ then which of the following is tr!eH 3. The s!stainable growth rate rate gives the ma8im!m rate at which sales can grow. 33. =8ternal financing will be ero. ero. 333. "sset growth m!st completel( come from increases in acco!nts pa(able and retained earnings. earnings. 3. 3f the firm pa(s o!t in dividends all of its net income+ sales cannot grow. "? 3 onl( $? 3+ 33+ and 333 onl ( C? 3 and 3 onl( /? 33+ 33 333+ an and 3 3 onl ( =? 3+ 33+ 333+ an and 3 "ns# C

Level# 3ntermediate



5). 3f a firm is to grow at its s!stainable growth rate+ its growth depends on which of the following factorsH factorsH 3. Profit margin 33. Financial polic( 333. /ividend polic( "? 3 onl( $? 3 and 33 onl( C? 3 and 333 onl( /? 33 and 333 onl( =? 3+ 33+ and 333 "ns# =

Level# 3ntermediate


5*. ,hich of the following firms wo!ld most likel( be interested in in knowing their s!stainable s!stainable growth rateH "? " firm firm that that belie believes ves its e6!it e6!it( ( m!ltip m!ltiplie lierr is at at its optimal optimal leve levell $? " firm firm that that has has no capa capaci cit( t( to to rai raise se new new debt debt C? " firm firm in in a mat!r mat!ree ind!st ind!str( r( that that e8pec e8pects ts limite limited d sales sales grow growth th in the the f!t!r f!t!ree /? " firm firm that that pa( pa(s no no divi divide dend ndss =? " firm firm that that has has a low low leve levell of investme investment nt in in fi8e fi8ed d asse assets ts "ns# "

Level# 3ntermediate


54. Mo! Mo! wish to comp!te a firms s!stainable growth rate from its acco!nting statements. To do so+ (o! co!ld !se the val!es of "? tota totall asse assets+ ts+ net net inc incom ome+ e+ and and the the ret reten entio tion n ratio ratio $? tota totall ass asset ets+ s+ inter interes estt pai paid+ d+ and and e6! e6!it( it( C? net net incom income+ e+ e6! e6!it( it(++ and and the the div divide idend nd pa( pa(o! o!tt ratio ratio /? inte intere rest st paid paid++ e6! e6!it( it(++ and and total total asse assets ts =? net net inco income me++ e6! e6!it it( (+ and and tot total al asse assets ts "ns# C

Level# $asic



Page 10


5. ,hich of the following are constant !nder the percentage percentage of sales approachH "? Prof Profit it marg margin in and and div divide idend nd pa(o! pa(o!tt rat ratio io $? "ddi "dditio tion n to to ret retai aine ned d ear earni ning ngss and and net net inco income me C? /ivi /ivide dend ndss pai paid d and and the the pro profi fitt marg margin in /? Costs Costs as a per perce cent ntag agee of sal sales es and and div divide idend ndss paid paid =? Costs Costs as as a perce percenta ntage ge of of sales sales and the additio addition n to reta retaine ined d earni earnings ngs "ns# "

Level# 3ntermediate

%!b&ect# Percentage :f %ales "pproach


50. The elements elements of financial financial planning planning incl!de# incl!de# 3 The res!lts of the net working capital decisions. 33 Consideration of the degree of financial leverage to be emplo(ed. 333 3nvestment opport!nities the firm chooses to p!rs!e. 3 The amo!nt of cash needed to pa( dividends. "? 3 and 3 onl(. $? 3+ 33 33+ an and 33 333 onl (. (. C? 33+ 333+ an and 3 onl(. l(. /? 3+ 333+ and 3 onl(. l(. =? 3+ 33+ 333+ an and 3. "ns# =

Level# 3ntermediate

%!b&ect# =lements :f Financial Planning


52. Financial Financial planning genera generall( ll( considers# considers# "? Two to five five prop proposa osals ls ove overr the the shor shortt-te term rm.. $? " two two to five five (ear (ear time time frame frame while while aggr aggrega egating ting smalle smallerr propo proposal sals. s. C? The details details of each each indiv individ!a id!all pro&ec pro&ectt over over the long-t long-term erm.. /? Thre Threee alter alterna nativ tivee scena scenari rios os over over the the short short-t -ter erm. m. =? "n aggreg aggregati ation on of pro&ec pro&ects ts over over the ne8t ne8t twent( twent(-fo -fo!r !r mon months ths.. "ns# $

Level# 3ntermediate



55. Financial Financial planning planning allows allows firms firms to# 3. "void "void f!t!re losses. 33. /evelop contingenc( plans. 333. "scertain e8pected financing needs. 3. =8plore and eval!ate vario!s options. "? 3 and 3 onl(. $? 333 and 3 onl(. C? 33 and 333 onl(. /? 33+ 33 333+ an and 3 3 onl(. l(. =? 3+ 33+ 333+ an and 3. "ns# /

Level# 3ntermediate



57. The sales foreca forecast st for most financia financiall plans is# "? /evelo /eveloped ped base based d !pon !pon the net net incom incomee fig!re fig!re provide provided d b( manag manageme ement. nt. $? Pro&ec Pro&ected ted based based on the the antic anticipa ipated ted level level of of debt debt fina financi ncing. ng. C? sed as as th the pl pl!g fi fig!re !re. /? /erive /erived d from from the the o!tp o!tp!t !t of of the the finan financia ciall plann planning ing proce process. ss. =? =8te 8ternall( ll( s!pplied ied. "ns# =

Level# $asic

%!b&ect# %ales Forecast



Page 12


79. Two of the more important economic factors that m!st be considered when doing a financial plan for a firm firm are the# "? G/P G/P grow growth th rate rate and and the the inte intere rest st rate. rate. $? nem nempl plo( o(me ment nt rate rate and and the the G/P G/P grow growth th rate. rate. C? 'arg 'argin inal al ta8 ta8 rat ratee and and the the inte intere rest st rate rate.. /? G/P G/P gro growt wth h rate rate and and the the marg margina inall ta8 ta8 rate rate.. =? 3nfl 3nflat atio ion n rat ratee and and the the inte intere rest st rat rate. e. "ns# C

Level# 3ntermediate

%!b&ect# =conomic "ss!mptions


71. 3ncreasing all acco!nts b( a fi8ed percentage ma( not be the best financial planning model beca!se# beca!se# "? The The deb debtt-e6 e6!i !it( t( rat ratio io wo! wo!ld ld var( var(.. $? >ot >ot all all acc acco! o!nt ntss var var( ( dir direc ectl( tl( with with sal sales es.. C? The The mo mode dell is diff diffic ic!l !ltt to !se. !se. /? The The grow growth th per perce centa ntage ge is is diff diffic ic!l !ltt to pre predi dict ct.. =? The The ret reten entio tion n rat ratio io m!st m!st be held held cons consta tant nt.. "ns# $

Level# 3ntermediate

%!b&ect# Financial Planning 'odel


7). 3f a firm lowers lowers its dividend dividend pa(o!t ratio+ ratio+ then the firms# firms# "? et >et inc incom omee wil willl inc increa rease. se. /? %!sta %!stain inab able le grow growth th rate rate will will inc incre reas ase. e. =? 3nte 3ntern rnal al grow growth th rat ratee wil willl decr decrea ease se.. "ns# /

Level# 3ntermediate


7*. ,hich one of the following ass!mptions applies to a worst case scenarioH scenarioH "? %ales %ales are pro&ec pro&ected ted !sing !sing the highes highestt e8pec e8pected ted val!e. val!e. $? The The mos mostt like likel( l( lev level el of sale saless is is !se !sed. d. C? The The bes bestt eco econo nomic mic ass! ass!mp mptio tions ns are are mad made. e. /? The The high highes estt leve levell of e8pa e8pans nsion ion is ass ass!me !med. d. =? Costs Costs are pro&ec pro&ected ted !sing !sing the highes highestt e8pe e8pecte cted d val! val!e. e. "ns# =

Level# 3ntermediate

%!b&ect# ,orst ,orst Case %cenario


74. ,hich one of the following is the ke( driver of most financial plansH "? >et income target $? %ales forecast C? "vaila ailabl blee net net wor worki king ng capi capita tall /? Cost of goods sold =?
Level# 3ntermediate

%!b&ect# Financial Planning Process



Page 15


7. ,hich one of the following statements is correct concerning the capital intensit( ratioH "? The capi capital tal inten intensit( sit( ratio ratio is is the reci recipro procal cal of of the tota totall asset asset t!rnove t!rnoverr ratio. ratio. $? The capita capitall intensit( intensit( ratio provides provides the the amo!nt amo!nt of sales sales genera generated ted for for each each B1 B1 in total total assets assets.. C? The highe higherr the capi capital tal inten intensit( sit( rati ratio+ o+ the less less emph emphasi asiss the firm firm p!ts p!ts on capi capital tal.. /? The capi capital tal inten intensit( sit( ratio ratio is !sed !sed to to comp! comp!te te the the intern internal al rate rate of grow growth. th. =? The capita capitall intensi intensit( t( ratio ratio relate relatess the amo!n amo!ntt of c!rren c!rrentt assets assets to longlong-ter term m assets. assets. "ns# "

Level# 3ntermediate


70. ,hich of the following following tend tend to var( directl( directl( with salesH salesH 3 3nventor( 33 "cco!nts pa(able 333 Long-term debt 3 >otes pa(able "? 3 and 33 onl( $? 333 and 3 onl( C? 3+ 33+ and 3 onl( /? 3+ 33+ and 333 onl ( =? 3+ 33+ 333+ an and 3 "ns# "

Level# 3ntermediate

%!b&ect# Percentage :f %ales 'ethod


72. ,hich one of the following statements is tr!e if a firm is operating at at less than f!ll f!ll capacit(H "? The =F> =F> comp!t comp!ted ed !sing !sing the the straig straight ht perce percentag ntagee method method will will be !nde !nderst rstate ated. d. $? The =F> =F> comp!t comp!ted ed !sing !sing the the strai straight ght perc percenta entage ge metho method d will will be acc!r acc!rate ate.. C? The =F> =F> comp!t comp!ted ed !sing !sing the the percen percentage tage of of sales sales appro approach ach will will be !nde !nderst rstate ated. d. /? The =F> =F> comp!t comp!ted ed !sing !sing the the percen percentage tage of of sales sales appro approach ach will will be acc! acc!rat rate. e. =? The =F> =F> comp!t comp!ted ed !sing !sing the the perce percentag ntagee of sale saless appro approach ach will will be be overst overstate ated. d. "ns# =

Level# 3ntermediate

%!b&ect# =fn "nd F!ll Capacit(


75. ,hich one of the following statements is correct concerning the e8ternal financing need @=F>? and the dividend pa(o!t ratioH "ss!me =F> is a positive n!mber. "? The The divi divide dend nd pa( pa(o! o!tt ratio ratio has has no eff effec ectt on the the =F> =F>.. $? "n incr increas easee in the divide dividend nd pa(o pa(o!t !t ratio ratio will decrea decrease se the the =F>. =F>. C? "n incr increas easee in the divide dividend nd pa(o pa(o!t !t ratio ratio will increa increase se the the =F>. =F>. /? The effe effect ct on =F> ca!sed ca!sed b( an an increase increase in the dividend dividend pa(o!t pa(o!t ratio can not not be predicted. predicted. =? "n incr increas easee in =F> ca!ses ca!ses the divide dividend nd pa(o pa(o!t !t ratio ratio to decr decreas ease. e. "ns# C

Level# 3ntermediate

%!b&ect# =fn "nd /ividend Pa(o!t

77. The e8ternal financing financing need tends to AAAAAA as the pro&ected growth rate rate in sales increases. increases. "? decrease $? increase C? remain constant /? var( var( in an !npr !npred edic icta tabl blee man manne ner r =? incr increa easse an and the then n dec decrreas ease "ns# $

Level# 3ntermediate

%!b&ect# =F> "nd Growth


Page 17


199. Financial Financial planning planning foc!ses foc!ses on# "? The individ individ!al !al compon component entss o off the the financ financial ial polic( polic(.. $? The ma&or ma&or elem element entss of the financ financial ial and invest investmen mentt polic policies ies.. C? "ntic "nticipa ipate ted d cha chang nges es onl( onl( in the shor short-r t-r!n !n.. /? The The inco income me sta state temen mentt b!t b!t not not the the bala balanc ncee shee sheet. t. =? Capi Capita tall str! str!ct ct!r !ree and and div divide idend nd pol polic( ic( onl( onl(.. "ns# $

Level# $asic



191. $eca!se Nerr(s 3ce Cream is c!rrentl( prod!cing prod!cing at less than f!ll capacit(+ capacit(+ the pro-forma for ne8t (ear sho!ld pro&ect# "? " decrease in sales les. $? " net loss. C? " decr decrea ease se in net net wor worki king ng capi capita tal. l. /? Fi8e Fi8ed d ass asset etss gro growin wing g slow slower er than than sale sales. s. =? " nega negati tive ve plow plowba back ck ratio atio.. "ns# /

Level# 3ntermediate

%!b&ect# Capacit( "nd Growth


19). " firms firms abilit( to s!stain growth growth depends depends !pon the# 3. Profit margin. 33. /ividend polic(. 333. Total Total asset t!rnover. 3. Financial Financi al polic(. polic (. "? 3 and 33 onl(. $? 333 and 3 onl(. C? 33+ 333+ an and 3 onl(. l(. /? 3+ 333+ and 3 onl(. l(. =? 3+ 33+ 333+ an and 3. "ns# =

Level# 3ntermediate

%!b&ect# Growth Factors


19*.. Financi 19* Financial al planning# planning# "? 3s a static model. $? %ho! %ho!ld ld be a p!r p!rel( el( acco acco!n !ntin ting g pro proce ced! d!re re.. C? 3s an iter iteraative tive proc proceess ss.. /? Foc!ses on on ne net in income. =? Conc Concen entr trat ates es on the the pres presen entt ope opera ratio tions ns.. "ns# C

Level# $asic



194. The s!stainable s!stainable growth growth rate rises rises as the AAAAAAA declines. declines. "? Profit ma margin $?
Level# 3ntermediate

%!b&ect# Growth


Page )9


19. Given the following information#sales O B49I costs O B499I ta8 rate O *4K. "ss!ming costs r!n at a constant percentage of sales+ if sales rise b ( 19K ne8t (ear+ what will net income beH "? B*.*9 $? B**.99 C? B*0.*9 /? B140.99 =? B172.)) "ns# C

Level# $asic


T(pe# T(pe# Problems

190. " firm earns earns net income of B)+999 in a given (ear and the firms firms retained earnings increase B1+999 B1+999 for that same (ear. (ear. The retention ratio is# "? )K $? 49K C? 09K /? 2K =? 199K "ns# C

Level# $asic

%!b&ect#

192. Given the following information# sales sales O B49+ costs O B*9+ ta8 rate O *4K+ retention ratio ratio O *9K+ prod!ction O 7K of capacit(+ sales increase O 19K. ,hat is the e8pected addition to retained earningsH @"ss!me costs change directl( with sales.? "? B1.75 $? B11.)) C? B17.59 /? B)1.25 =? B9.5) "ns# /

Level# 3ntermediate

%!b&ect#

195. Pick!p 3nd!stries has has a profit margin of 1K and a dividend pa(o!t pa(o!t of 49K. Last (ears sales sales were B099 million and total assets were B499 million. >one of the liabilities var( directl( with sales+ b!t assets and costs do. 3f the sales growth rate for Pick!p is )9K+ how m!ch e8ternal financing is neededH neededH "? B.) million $? B1*.1 million C? B1.) million /? B)1.* million =? B)0.9 million "ns# C

Level# 3ntermediate




Page )1


197. Given the following information# assets O B799I B799I acco!nts pa(able O B119I B119I notes pa(able O B199I long-term long-term debt O B19I e6!it( O B49I sales O B49I costs O B499I ta8 rate O *4KI dividends O B10. 9. Costs+ assets+ and acco!nts pa(able maintain a constant constant ratio to sales. ow m!ch e8ternal financing is needed needed if sales increase 1K and the dividend pa(o!t ratio is constantH "? B51 $? B74 C? B199 /? B190 =? B1)) "ns# C

Level# Challenge



119. %!ppose a firm has net income of B199 and a profit margin margin e6!al to 14K. 3f the firm is working at )E* )E* capacit(+ then f!ll capacit( sales are# "? B420 $? B*7 C? B214 /? B 5)* =? B1+921 "ns# =

Level# 3ntermediate

%!b&ect# F!ll Capacit( %ales


111.. n!dsen+ 3nc. s firms 111 firms f!ll-capacit( sales level is B*+999+999. 3f the firm is c!rrentl( operating operating at 59K of capacit(+ what is the c!rrent level of salesH "? B099+999 $? B1+99+999 C? B1+29+999 /? B)+499+999 =? B*+29+999 "ns# /

Level# 3ntermediate



11). Given the following information# c!rrent assets O B499I fi8ed assets O B99I acco!nts pa(able O B199I B199I notes pa(able O B4I long-term debt O B4I e6!it( O B*99I sales O B49I costs O B499I ta8 rate O *4K. %!ppose that c!rrent assets+ costs+ costs+ and acco!nts pa(able maintain a constant ratio to sales. 3f the firm is prod!cing at 59K capacit(+ what what is the total e8ternal financing needed if sales increase )KH "ss!me "ss!me the firm pa(s no dividends. "? B**.2 $? B00.) C? B14*.2 /? B12).9 =? B*59.) "ns# "

Level# 3ntermediate

%!b&ect# =8cess Capacit( Q =8ternal...



Page ))


11*. 'oore 'one( 3nc has has a profit margin of 11K and a retention ratio of 29K. Last (ear+ the firm had sales of B99 and total assets of B1+999. ,hat is the internal growth rateH rateH "? 1.2K $? ).0K C? *.2K /? 4.9K =? .7K "ns# /

Level# 3ntermediate


114. Given the following information# profit margin O 19KI sales O B199I retention retention ratio O 49KI assets O B)99I B)99I e6!it( m!ltiplier O ).9. 3f the firm maintains a constant constant debt-e6!it( ratio and no new e6!it( e6!it( is !sed+ what is the ma8im!m growth rateH rateH @"ss!me a constant constant profit margin.? "? ).94K $? ).*4K C? *.05K /? 4.12K =? .7*K "ns# /

Level# 3ntermediate


11. %impl(
Level# 3ntermediate


110. 'oore 'one( 3nc has has a profit margin of 11K and a retention ratio of 29K. Last (ear+ the firm had sales of B99 and total assets assets of B1+999. The desired total debt ratio is 2K. 2K. ,hat is the firms s!stainable growth rateH "? ).K $? 4.9K C? 2. 1K /? 11.*K =? 15.)K "ns# =

Level# 3ntermediate


112. %!ppose a firm has net net income of B9+ dividends of B1+ assets assets of B1+)99 and a debt-e6!it( debt-e6!it( ratio of *.9. ,hat is the s!stainable growth rateH "? 1.K $? 4.9K C? 7.0K /? 1*.)K =? 15.1K "ns# /

Level# 3ntermediate




Page )*


115. "ss!me a firm has sales of B4+29 on assets totaling B)+99+ net income of B*2+ and dividends of B19. ,hat is the s!stainable growth rate if the e6!it( has a val!e of B1+99H "? )).7K $? 12.0K C? 1*.9K /? 11.1K =? 7.7K "ns# $

Level# 3ntermediate


se the following to answer 6!estions 117-1)1# >et income O B19I Total Total assets O B1+999I Total Total liabilities O B499I Total asset t!rnover O 4. 9 117. ,hat "? $? C? /? =?

is the capital intensit( ratio ratio ass!ming dividends paid total B199H B199H 9.99 9.) 9.9 ).99 4.99

"ns# $ 1)9. ,hat "? $? C? /? =?


is the internal growth rate ass!ming dividends paid total B199H 1.1K ).K .*K 5.*K 7.1K

"ns# C 1)1. ,hat "? $? C? /? =?

Level# 3ntermediate

Level# 3ntermediate


is the s!stainable growth rate ass!ming dividends paid total B9H ).K .*K 5.*K 7.1K 11.11K

"ns# =

Level# 3ntermediate



Page )4


se the following to answer 6!estions 1))-1)#

Cash 3nventor( Fi8ed assets

B 9 B19 B099

Total assets

B599

%tone otes pa(able Long-term debt =6!it( Total liabilities Q e6!it(

B199 1 99 *9 )9 B599

%tone et income

B 59 9 09 9 B)99 05 B1*)

1)). %!ppose that c!rrent assets+ costs+ and acco!nts pa(able maintain a constant constant ratio to sales. The firm retains 49K of earnings. 3f the firm is prod!cing at onl( 79K capacit(+ what is the total e8ternal financing needed if sales increase )KH "? B1 $? B*4 C? B41 /? B42 =? B7 4 "ns# $

Level# Challenge



1)*. %!ppose the firm retains )5K of earnings+ while assets assets and costs maintain maintain a constant percentage percentage of sales. sales. 3f the firm is prod!cing at f!ll capacit(+ what is the internal growth rateH "? 1.7K $? 4.5K C? 19.1K /? 1*.K =? 12.*K "ns# $

Level# Challenge


1)4. %!ppose that assets and costs maintain a constant ratio to sales. The firm retains *9K of earnings. earnings. 3f the firm is prod!cing at f!ll capacit(+ what is the ma8im!m growth rate+ ass!ming no e6!it( sales+ that will maintain a constant debt-e6!it( ratioH "? .)K $? 1.0K C? 15.5K /? )1.9K =? )7.)K "ns# C

Level# Challenge



Page )


1). %!ppose the firm wishes to maintain a constant constant debt-e6!it( ratio+ retains 09K of net income+ and raises no new e6!it(. "ssets and costs maintain a constant ratio to sales. sales. ,hat is the ma8im!m increase in sales the firm can achieveH "? B55 $? B)47 C? B*21 /? B4)7 =? B59 "ns# C

Level# Challenge


se the following to answer 6!estions 1)0-1*)# %tansfield Corporation 3ncome %tatement @B in millions? %ales Costs =$T Ta8es @*4K? >et income
B*99 )9 B 9 12 B ** B )) B 11

Cash "cco!nts receivables 3nventor( C!rrent assets >et plant Q e6!ip. Total assets

%tansfield Corporation $alance %heet @B in millions? B "cco!nts pa(able 49 >otes pa(able 0 C!rrent liabilities B119 Long-term debt )79 Common stock
B 49 *9 B 29 1 2 199 B 49 9

1)0. "ss!ming a constant profit profit margin+ what will %tansfield Corporations net net income be if sales increase b( 19KH "? B**.9 million $? B*4. million C? B*0.* million /? B*7.0 million =? B09.9 million "ns# C

Level# Challenge




Page )0


1)2. ,hat is %tansfield Corporations addition to retained retained earnings with a 19K increase increase in salesH "ss!me "ss!me the dividend pa(o!t ratio and profit m argin remain fi8ed. "? B)).9 million $? B)4.) million C? B)0.4 million /? B)7.2 million =? B*7.9 million "ns# $

Level# Challenge

%!b&ect#

1)5. "ss!me %tansfield Corporation Corporation is operating at at f!ll capacit(. capacit(. ,hat will total assets be if sales increase b( 19KH "ss!me costs+ c!rrent liabilities+ and c!rrent assets var( directl( with sales and that the divi dend pa(o!t ratio remains !nchanged. "? B)).9 million $? B)*1.0 mi million C? B)40.2 mi million /? B**9. million =? B449.9 million "ns# =

Level# Challenge

%!b&ect# Total Total "ssets


1)7. "ss!me %tansfield Corporation is !tiliing its fi8ed assets at 79K capacit(. capacit(. "ss!me costs+ costs+ c!rrent liabilities+ and c!rrent assets var( directl( with sales+ and that the dividend pa(o!t ratio remains !nchanged. 3f sales increase b( )9K+ what will total fi8ed assets beH "? B)0 million $? B)50 million C? B*1* million /? B*7 million =? B429 million "ns# C

Level# Challenge



1*9. ow m!ch e8ternal financing is needed needed for a )9K increase increase in sales if the Corporation Corporation is c!rrentl( operating at f!ll capacit(H "ss!me assets and costs var( directl( with sales b!t no c!rrent liabilities increase with sales and that the dividend pa(o!t ratio remains fi8ed. "? B9 $? B)*.) million C? B)2.0 million /? B*2.4 million =? B*.0 million "ns# =

Level# Challenge



1*1. ,hat is the addition addition to retained earnings if %tansfield grows at the internal growth rateH @"ss!me the dividend pa(o!t ratio is fi8ed.? "? B.5 million $? B1*.* million C? B)*.* million /? B)4.7 million =? B**.9 million "ns# C

Level# Challenge



Page )2


1*). ,hat is %tansfield Corporations addition to total assets if the( grow at the s!stainable s!stainable growth rateH @"ss!me the dividend pa(o!t ratio is fi8ed.? "? B1 million $? B)* million C? B*) million /? B44 million =? B5 million "ns# =

Level# Challenge


se the following to answer 6!estions 1**-141# 'arble Comics Gro!p $alance %heet for Mears Mears =nding )99) and )99* @B in millions? )99) )99* Cash "cco!nts receivable 3nventor( C!rrent assets Fi8ed assets Total assets

B 2 )*9 )49 4 255

B 1* )14 155 *2 579

B1+***

B1+4)2

"cco!nts pa(able >otes pa(able C!rrent liabilities Long-term debt Common stock
'arble Comics Gro!p )99* 3ncome %tatement @B in millions? >et sales Less# Cost of goods sold Less# General Q adm. e8penses Less# /epreciation =arnings before interest and ta8es Less# 3nterest paid =arnings before ta8es Less# Ta8es >et income

B79 )) 7* 119 159 01 117 *9 B 57

1**. ,hat is 'arbles 'arbles earnings earnings retention retention ratio for )99*H )99*H "? 9.*2 $? 9.47 C? 9.0* /? 9.57 =? 9.7) "ns# C

Level# $asic

%!b&ect#


Page )5

) 99 )

)9 9*

B 57 ))2 * 10 01  *42 B1+***

B119 4 4)  ) 449  *59 B1+4)2


1*4. %!ppose 'arble is pro&ecting a )9K increase in sales for the coming (ear+ (ear+ and that cost of goods goods sold and generalEadministrative e8penses remain a constant percentage of sales. "lso ass!me that depreciation+ interest paid+ and the firms ta8 rate remain remain !nchanged. ,hat will the firm pa( o!t in dividends in )994H "ss!me the firms dividend pa(o!t is 49K. "? B*9 $? B*) C? B45 /? B* =? B0 2 "ns# /

Level# 3ntermediate

%!b&ect# /ividends


1*. $ased on the )99* data+ data+ what is 'arbles capital capital intensit( intensit( ratioH "? 1.)9 $? 1.)* C? 1.* /? 1.42 =? 1.5 "ns# =

Level# $asic



1*0. %!ppose 'arble 'arble is c!rrentl( c!rrentl( operating at 29K of capacit(. ,hat are f!ll capacit( salesH salesH "? B)21 $? B0** C? B750 /? B1+)7* =? B*+912 "ns# /

Level# 3ntermediate



1*2. "ss!me 'arble is pro&ecting a )9K )9K increase in sales for for the coming (ear+ and that assets+ all costs+ and c!rrent liabilities are proportional proportional to sales. Long-term debt is not proportional to sales. sales. "ss!me the firms ta8 rate remains !nchanged and the dividend pa(o!t is 49K. ,hat is the e8ternal financing needed needed @=F>? for )994H "? B04.1 $? B119.7 C? B1*).* /? B140.2 =? B1).7 "ns# $

Level# Challenge




Page )7


1*5. "ss!me 'arble is pro&ecting a )9K )9K increase in sales for for the coming (ear+ with c!rrent assets+ all costs+ and c!rrent liabilities proportional to sales. Long-term debt is not proportional to sales. 3f the firms ta8 rate remains !nchanged+ the dividend pa(o!t is 49K+ and 'arble is operating at 29K of capacit(+ what is the e8ternal financing needed @=F>? for )994H "? =F> is negative $? B)1.74 C? B45.*1 /? B20.*) =? B57.5 "ns# "

Level# Challenge



1*7. ,hich of the following describes the components of 'arbles 'arbles )99* <:= from the /! Pont Pont identit(H "? .975I .0 .0*4I *. *.)5 $? .975I .027I *.)5 C? .975I .027I *.90 /? .975I .0 .0*4I *. *.90 =? .975I .027I *.20 "ns# "

Level# 3ntermediate

%!b&ect# /eterminants :f Growth


149. $ased on the )99* financial statement data+ data+ 'arbles internal growth rate is AAAAAA. AAAAAA. @"ss!me the dividend pa(o!t ratio is fi8ed.? "? ).4K $? ).K C? 4.1K /? 5.)K =? 7.K "ns# "

Level# 3ntermediate


141. $ased on the )99* financial statement data+ data+ 'arbles s!stainable growth rate is AAAAAAA. @"ss!me the dividend pa(o!t ratio is fi8ed.? "? ).4K $? ).K C? 4.1K /? 5.)K =? 7.K "ns# /

Level# 3ntermediate


se the following to answer 6!estions 14)-144# C!rrent "ssets >et Fi8ed ".

B199 B)99

Total "ssets

B*99

"ccts. Pa(. Long term debt =6!it( Total LQ= >e >et 3ncome

B9 B199 B19 B*99 B1*)

%ales Costs Ta8able income Ta8es


Page *9

B1+999 B599 B)99 B05


14). "ss!me costs+ assets+ and acco!nts pa(able all increase at the same same rate as as sales. "lso ass!me ass!me 59K of of net income is paid o!t o!t in dividends. 3f sales grow grow at )K+ comp!te e8ternal financing needed. needed. "? B9.99 $? B4.9 C? B)).9 /? B)7.9 =? B).99 "ns# /

Level# Challenge



14*. "ss!me costs+ acco!nts pa(able+ and c!rrent assets all increase at the same rate as sales. "lso ass!me ass!me 59K of net income is paid o!t in dividends and that the firm is c!rrentl( operating operating at 79K of capacit(. capacit(. 3f sales grow at )K+ comp!te e8ternal financing needed. "? B9.99 $? B4.9 C? B)).9 /? B)7.9 =? B).99 "ns# $

Level# Challenge



144. "ss!me costs and assets increase at the same rate rate as sales. "lso ass!me ass!me 49K of net income is paid paid o!t in dividends. ,hat is the ma8im!m growth rate achievable ass!ming no e8ternal debt or e6!it( is availableH "? 11.)K $? ).4K C? *.5K /? 1.0K =? 111.5K "ns# C

Level# Challenge



Page *1


se the following to answer 6!estion 14# 'arble Comics Gro!p $alance %heet for Mear Mear =nding )99) and )99* @B in millions? )99) )99* )99) Cash "cco!nts receivable 3nventor( C!rrent assets Fi8ed assets Total assets

B 2 )*9 )49 4  255

B 1 * )14 155 *2 579

B1+***

B1+4)2

)9 9 *

B 57 ))2 *10 0 1  *42 B1+***

B119 44) ) 44 9  *5 9 B1+4)2

'arble Comics Gro!p )99* 3ncome %tatement @B in millions? >et sales B79 Less# Cost of goods sold Less# General Q adm. e8penses Less# /epreciation =arnings before interest and ta8es Less# 3nterest paid =arnings before ta8es Less# Ta8es >et income

 )) 7* 119 1 59 01 117 *9 B 57

14. "ss!me costs and assets increase at the same rate rate as sales. "lso ass!me ass!me 49K of net income is paid paid o!t in dividends+ the c!rrent debt to e6!it( ratio is optimal+ and that no new e6!it( sales are possible? Forecast the addition to retained earnings ass!ming the firms sales increase at the ma8im!m percent possible given these ass!mptions. "? B4*.) $? B55. C? B11*.* /? B140.2 =? B102.5 "ns# =

Level# Challenge


140. " firm c!rrentl( c!rrentl( has sales of B0*9+999 B0*9+999 and costs of B*+0*0. The The marginal ta8 rate is *4K. nder the percentage of sales approach+ what is the pro&ected net income if sales are e8pected to increase b( 1KH "? B9+499 $? B4+4*) C? B2+701 /? B2)+041 =? B74+99 "ns# C

Level# 3ntermediate

%!b&ect# Percentage :f %ales "pproach



Page *)


142. " firm firm c!rrentl( has sales of B9+999+ B9+999+ a 0K profit profit margin and a 49K dividend pa(o!t ratio. ,hat is the anticipated amo!nt of dividends to be paid to shareholders if sales are e8pected to increase b( KH "? B1*+)99 $? B1*+509 C? B*4+09 /? B))9+999 =? B)*1+999 "ns# $

Level# 3ntermediate


145. " firm c!rrentl( c!rrentl( has sales of B504+999+ B504+999+ a *4K marginal ta8 rate+ rate+ and a dividend pa(o!t ratio of K. K. Costs e6!al 5K of sales. ,hat is the anticipated increase to retained earnings if sales are e8pected to increase b( 0KH "? B*5+47) $? B49+591 C? B42+944 /? B47+502 =? B79+005 "ns# $

Level# 3ntermediate

%!b&ect# Plowback

147. "t the end of last (ear+ (ear+ a firm had a c!rrent c!rrent ratio of 1.4+ net fi8ed assets assets of B)+99+ notes pa(able of B9+ and total assets of B+199. $ased on pro-forma sales+ c!rrent liabilities will increase b( B99 and c!rrent assets will increase b( B799. $( how m!ch can notes pa(able increase on the pro forma statement witho!t changing the c!rrent ratioH "? B9 $? B14* C? B499 /? B002 =? B209 "ns# $

Level# Challenge

%!b&ect# Pro-Forma >et ,orking ,orking Capital


19. " firm has has sales of B09+707 and is operating at 5*K capacit(. capacit(. The firm has has total assets of B475+*99 and c!rrent assets of B50+799. ,hat is the capital intensit( ratio at f!ll capacit(H "? . ) $? .0 4 C? 1.94 /? 1.5 =? 1.7) "ns# $

Level# 3ntermediate

%!b&ect# Capacit( sage


11. " firm has has an <:= of 2.K and an an <:" of 1*.K. ,hat is the internal growth rate rate if the firm has a 49K dividend pa(o!t ratioH "? 4.21K $? .21K C? 5.19K /? 5.51K =? 7.17K "ns# /

Level# 3ntermediate



Page **


1). "ss!ming the following following ratios are constant+ what is the s!stainable growth rateH Total asset t!rnover Profit margin =6!it( m!ltiplier Pa(o!t ratio "? 5.99K $? 19.0)K C? 14.49K /? 10.5)K =? )4.99K "ns# $

O ).99 O .9K O 1.9 O 09K

Level# 3ntermediate


1*. $ased on the following information+ information+ what is the s!stainable growth rateH /ividends >et income /ebt-e6!it( ratio Capital intensit( ratio Profit margin O 5K "? *.97K $? *.77 C? .4)K /? 0.11K =? 7.79K "ns# /

Level# Challenge

O B1)+999 O B*9+999 O . 9 O 1.)


14. " firm c!rrentl( c!rrentl( has sales of B1.*) million and B704+99 in fi8ed assets. C!rrentl( C!rrentl( operations are at 54K of capacit(. $( how m!ch can sales increase witho!t re6!iring the firm to p!rchase an( additional fi8ed assetsH "? B14+*)9 $? B15*+214 C? B)11+)99 /? B)1+4)7 =? B*+99 "ns# /

Level# 3ntermediate

%!b&ect# F!ll Capacit(


1. " firm has has an 5K profit margin margin and a .7 ratio of sales to total assets. assets. The firm maintains a 49K 49K dividend pa(o!t ratio and a 19K rate of growth. 3f the debt-e6!it( ratio is held constant+ what m!st that rate beH "? .2 9 $? .5 7 C? 1.11 /? 1.) =? 1.29 "ns# "

Level# Challenge

%!b&ect# Growth "nd /ebt-=6!it(


Page *4


se the following to answer 6!estions 10-109# ,intergreen+ ,intergreen+ 3nc 3ncome %tatement for the Present Mear Mear >et sales Costs Ta8able income Ta8es >et income

B14+09 B1)+19* B)+42 B500 B1+051 ,intergreen+ 3nc. $alance %heet for the Present Mear Mear

Cash "cco!nts receivable 3nventor( Total >et fi8ed assets

B )  B*+1* B720 B4+0*0 B)*+229

Total assets

B)5+490 B)5+490

"cco!nts pa(able >otes pa(able Total Long-term debt Common stock
B1+70* B)+015 B4+51 B0+099 B2+99 B7+2)

"ssets+ acco!nts pa(able and costs are proportional to sales. /ebt and e6!it( are not. 10. %ales of ,intergreen+ ,intergreen+ 3nc. are e8pected to increase b( 2K ne8t (ear. (ear. ,intergreen ,intergreen is c!rrentl( operating at ma8im!m capacit(. ,intergreen ,intergreen does not pa( a dividend. Given t his pro&ection+ which one of the t he following statements is correct concerning ne8t (ears pro forma statement for ,intergreen ,intergreen 3nc. if the percentage of sales approach is !sedH "? Cost Costss are are pro pro&e &ect cted ed to be be B11 B11+*11 +*11.. $? >et >et inco income me is is pro pro&e &ect cted ed to be be B1+ B1+75 750. 0. C? The The pro pro&e &ect cted ed ret retai aine ned d earn earning ingss is B11+ B11+49 490. 0. /? The The long long-t -ter erm m debt debt is is pro&e pro&ect cted ed to to be B2+9 B2+90) 0).. =? The The =F> =F> is pro& pro&ec ecte ted d to to be be B B). "ns# =

Level# 3ntermediate

%!b&ect# Percentage :f %ales 'ethod


12. %ales of ,intergreen+ ,intergreen+ 3nc are e8pected to increase b( 0K ne8t (ear. (ear. ,intergreen ,intergreen is c!rrentl( operating at ma8im!m capacit(. ,intergreen ,intergreen has a )9K dividend pa(o!t ratio. ,hat is the e8ternal financing needH "? -B170 $? -B101 C? B101 /? B170 =? B)27 "ns# C

Level# 3ntermediate

%!b&ect# =8ternal Financing >eed



Page *


15. %ales of ,intergreen+ ,intergreen+ 3nc. are e8pected to increase b( 1)K ne8t (ear. (ear. ,intergreen ,intergreen is c!rrentl( operating at 5K of capacit(. The plowback ratio is 09K. ,hat is the e8ternal financing needH "? -B519 $? -B4** C? B1+)79 /? B1+0* =? B)+94* "ns# "

Level# Challenge



17. ,intergreen+ ,intergreen+ 3nc. is prod!cing at 5)K of of capacit(. ,hat is the capital intensit( ratio at ma8im!m capacit(H capacit(H "? . * $? .0 * C? 1.)) /? 1.44 =? 1.7 "ns# =

Level# 3ntermediate


109. %ales of ,intergreen+ ,intergreen+ 3nc. are are e8pected to increase b( 1*K ne8t (ear. (ear. The dividend pa(o!t pa(o!t ratio is *K. The compan( is c!rrentl( operating at 7*K of capacit(. ,hat is the pro&ected retained earnings balance at the end of ne8t (earH "? B1*) $? B414 C? B1+)* /? B)+952 =? B)+)9* "ns# C

Level# 3ntermediate

%!b&ect#


Page *0


se the following to answer 6!estions 101-10# /o!glass =nterprises 3ncome %tatement for the Present Mear Mear %ales Costs Ta8able 3ncome Ta8es >et 3ncome /i /ividends "ddition to ret. earnings

B4+549 B4+1)9 B2)9 B)4 B42 B179 B)5

/o!glass =nterprises $alance %heet for the Present P resent Mear Mear Cash "cco!nts rec. 3nventor( C!rrent assets Fi8ed assets

B1+919 B *9 ) B*01 B1+02* B+)99

Total assets

B0+52*

B*0 B1+99 B)+9*0 B1+)99 B*+999 B0*2 B0+52*

"ssets+ acco!nts pa(able and costs are proportional to sales. /ebt and e6!it( are not. 101. ,hat is the internal internal rate of growth for /o!glass /o!glass =nterprise =nterprisesH sH "? 4.**K $? 0.99K C? 0.71K /? 2.*7K =? 11.)4K "ns# " 10). ,hat "? $? C? /? =?

Level# 3ntermediate

%!b&ect# 3nternal

is the s!stainable rate of growth for for /o!glass =nterprisesH 2.54K 5.9K 5.07K 7.))K 1.9)K

"ns# $

Level# 3ntermediate

%!b&ect# %!stainable


Page *2


10*. The sales of /o!glass =nterprises =nterprises are e8pected to increase increase b( 14K ne8t (ear. (ear. The The firm is c!rrentl( prod!cing at f!ll capacit(. 'anagement 'anagement wants to maintain a constant debt-e6!it( ratio and a constant dividend pa(o!t ratio. ,hat is the t he e8ternal financing needH "? -B*) $? -B)*5 C? B4) /? B0) =? B70) "ns# /

Level# 3ntermediate



104. The sales of /o!glass =nterprises =nterprises are e8pected to increase increase b( 7K ne8t (ear. (ear. The The debt-e6!it( ratio and the dividend pa(o!t ratio are to be held constant. C!rrentl( the firm is prod!cing at 5)K of capacit(. ,hat is the addition to retained earningsH "? B*11 $? B*5 C? B4*2 /? B42 =? B15 "ns# "

Level# 3ntermediate

%!b&ect# "ddition To

10. The sales of /o!glass =nterprises =nterprises are e8pected to increase increase b( 19K ne8t (ear. (ear. The The debt-e6!it( ratio and the dividend pa(o!t ratio are to be held constant. C!rrentl( the firm is prod!cing at 55K of capacit(. ,hat is the re6!ired increase in net fi8ed assetsH "? B9 $? B120 C? B)51 /? B*1) =? B)9 "ns# "

Level# 3ntermediate

%!b&ect# 3ncrease 3n >et Fi8ed "ssets


100. The a!thors state that Jconventional b!siness wisdom wisdom holds that financial financial plans dont work+ b!t financial planning does. J ,hat is meant b( thisH 3gnoring the acc!rac( of the n!mbers in a financial plan @which can onl( be determined after the fact an(wa(?+ what does the process of financial pl anning accomplishH "ns# "n !nderl(ing !nderl(ing theme theme of the chapter chapter is that+ while no one can can predict predict f!t!re events+ events+ the act of planning for vario!s contingencies forces decision-makers decision-makers to consider what might happen+ as well as the interactions between investment and financing decisions and the implications of their t heir decisions on other aspects of firm performance. 3n other words+ alert st!dents will pick !p on the integrative nat!re of financial planning. Level# Challenge


T(pe# T(pe# =ssa(s

102. ow wo!ld (o! respond to a b!siness b!siness owner who sa(s J3 see no need in p!tting together a financial plan for the f!t!re. "ll of the n!mbers in t he plan are &!st g!esses an(wa(+ no one knows what will happen for s!re. 3 have a good idea what sales will be and be(ond that+ if sales are good+ who needs a planHJ "ns# This is an open-ended open-ended 6!estion 6!estion that basicall( basicall( asks st!dents st!dents to list the advantages advantages to be gained from from financial planning. 'ore importantl(+ it ma( be a 6!estion the st!dent has has not tho!ght abo!t abo!t in these terms. Level# Challenge

%!b&ect# $enefits of Planning

T(pe# T(pe# =ssa(s


Page *5


105. ,hat do (o! think will happen to a growing growing b!siness whose owner can can forecast sales 6!ite acc!ratel( acc!ratel( b!t has no idea what impact sales growth will have on assetsH "ns# The b!siness b!siness will need to add assets to grow+ grow+ and will likel( e8perience e8ternal financing needs. needs. 3n addition+ the firm will likel( e8perience li6!idit( problems and the manager will need to devote time and energ( to solving those problems. Level# Challenge


T(pe# T(pe# =ssa(s

107. 3t is stated in the te8t that the planners ass!mptions abo!t f!t!re sales growth growth serves as the JdriverJ JdriverJ for the financial plan. ,hat factors andEor t(pes t(pes of decisions determine how m!ch sales sales growth the firm can accommodateH "ns# This is an open-ended open-ended 6!estion 6!estion which reall( reall( gets to the heart of the financial financial planning process processII i.e.+ the management of growth. %ome instr!ctors ma( wish to emphasie emphasie in their lect!res that @to paraphrase iggins? a firm can Jgrow itself o!t of b!sinessJ. 3n other words+ rapid+ !ne8pected sales increases can res!lt res!lt in poor capital b!dgeting+ financing+ or working capital decisions. $( !nderstanding what factors contrib!te to the firms i nternal and s!stainable growth rates+ st!dents can better !nderstand the nat!re of the decisions necessar( to accommodate growth. growth. Level# Challenge

%!b&ect# %ales Growth

T(pe# T(pe# =ssa(s

129. %!ppose a firm calc!lates its =F> and finds that it is negative. ,hat ,hat are the firms options in this caseH caseH "ns# ,ith ,ith negative =F>+ =F>+ the firm has a s!rpl!s of f!nds that that it can !se to red!ce red!ce c!rrent c!rrent liabilities+ liabilities+ red!ce long-term debt+ b!( back common stock+ or increase dividends. "s a least-best alternative+ the firm co!ld choose to add assets+ b!t this t his re6!ires some additional ass!mptions abo!t >Ps+ etc. Level# Challenge

%!b&ect# >egative =F>

T(pe# T(pe# =ssa(s

121. %tate the ass!mptions that !nderlie the s!stainable s!stainable growth rate and and interpret what the s!stainable growth rate means. "ns# The !s!al !s!al ass!mptions ass!mptions are# Costs and assets assets increase increase proportiona proportionatel( tel( with sales+ sales+ the dividend pa(o!t pa(o!t ratio is fi8ed @or is given?+ the c!rrent debt-e6!it( ratio is optimal+ no new e6!it( sales are possible. The s!stainable growth rate is the ma8im!m rate at which sales can increase with the restriction that no new e6!it( sales are possible and long-term debt increases onl( in an amo!nt that keeps the debte6!it( ratio fi8ed. Level# Challenge


T(pe# T(pe# =ssa(s

12). Consider a firm which forecasts that costs+ assets+ and and c!rrent liabilities will all change proportionatel( with sales and the dividend pa(o!t ratio will remain fi8ed. ow will the firms <:= change as a res!lt of a forecast *9K increase in salesH ow will the individ!al components of <:= @the /! Pont identit (? changeH ,h(H "ns# The <:= and all of its componentsRpr componentsRprofit ofit margin+ margin+ total asset t!rnover t!rnover++ and e6!it( m!ltiplierRw m!ltiplierRwill ill all remain !nchanged. This is the essence of the percentage of sales approach approach to forecasting. Level# 3ntermediate

%!b&ect# 3nterpreting Growth

T(pe# T(pe# =ssa(s


Page *7


12*. Fi8ed assets are often said said to grow in a Jstair-stepJ Jstair-stepJ like manner. ,hat does this meanH ,h( ,h( is this a better wa( to e8plain the growth of fi8ed assets as compared to sa(ing that fi8ed assets grow proportionall( with salesH "ns# The nat!re of fi8ed assets prevents prevents them from from rising proportionatel( proportionatel( with each each !nit increase in sales. 3nstead+ a firm will p!rchase new e6!ipment or b!ild a new facilit( as it nears f!ll capacit(. The new assets will then increase the capacit( capacit( level and ca!se the firm firm to prod!ce below that level. This will contin!e !ntil s!ch time as sales begin to reach the new ma8im!m level of prod!ction+ at which time the firm will consider additional additi onal fi8ed asset p!rchases. Th!s+ fi8ed assets increase in a Jstair-stepJ like pattern rather than as a straight linear f!nction. Level# 3ntermediate

%!b&ect# Fi8ed "sset Growth

T(pe# T(pe# =ssa(s

124. 3n general+ wo!ld firms tend to follow follow the internal rate of growth or the s!stainable rate of growthH =8plain =8plain the reasoning behind (o!r answer. "ns# ,hile opinions opinions ma( var(+ var(+ this 6!estion 6!estion sho!ld get st!dents st!dents thinking abo!t abo!t the difference differencess and the meaning of each growth rate. %ince man( firms tend to hold their debt-e6!it( ratio fairl( constant+ the primar( arg!ment sho!ld be that the s!stainable growth rate is more commonl ( !sed. Level# 3ntermediate

%!b&ect# 3nternal ers!s ers!s %!stainable

T(pe# T(pe# =ssa(s

Page 49

Chapter 04

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