Question 1

List and briefly describe the components of a financial planning model.

Accepted Answer

The first of three components of a finan

Question 2

What is the maximum internal growth rate consistent with not requiring external funding for a firm reporting net income of $500,000, a dividend payout ratio of 40%, and total assets of $10 million?

Accepted Answer

A) 2% 
B) 3% 
C) 5% 
D) 6% Internal growth rate = retained earnings/assets
= ($500,000 x .06)/$10 million
= $300,000/10 million 
A) 2% 
B) 3% 
C) 5% 
D) 6% Internal growth rate = retained earnings/assets
= ($500,000 x .06)/$10 million
= $300,000/10 million

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

If a firm chooses to maintain a fixed debt-equity ratio, they can raise the additional needed funds by:

Accepted Answer

A) Issuing debt, in which case dividends become the balancing item 
B) Issuing debt, in which case the amount of debt itself becomes the balancing item 
C) Issuing stock, in which case dividends become the balancing item 
D) Issuing stock, in which case no balancing item is needed 
A) Issuing debt, in which case dividends become the balancing item 
B) Issuing debt, in which case the amount of debt itself becomes the balancing item 
C) Issuing stock, in which case dividends become the balancing item 
D) Issuing stock, in which case no balancing item is needed

Question 5

An all equity financed firm has an asset turnover of 2, and its plowback ratio is 50%.Determine its Maximum payout ratio that will allow an 8% internally generated growth.

Accepted Answer

A) 25% 
B) 33% 
C) 45% 
D) 67% 
A) 25% 
B) 33% 
C) 45% 
D) 67%

Question 6

If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of .75 then:

Accepted Answer

A) Debt must increase by $300,000 
B) Equity must increase by the full $400,000 
C) Debt must increase by $171,429 
D) Equity must increase by $100,000 
A) Debt must increase by $300,000 
B) Equity must increase by the full $400,000 
C) Debt must increase by $171,429 
D) Equity must increase by $100,000

Question 7

A firm has a debt equity ratio of 1/3, and plans to grow at an annual rate of 10%.Its return on equity is 18%.What is the maximum payout ratio that a company can maintain without resorting to new equity issue?

Accepted Answer

A) 24% 
B) 25% 
C) 26% 
D) 27% If = , then =
Internal growth rate = Plowback ratio * ROEBEG *
)10 = Plowback ratio * .18 * .75
Plowback ratio = .10/(.18 * .75) = .74 = 74% 
A) 24% 
B) 25% 
C) 26% 
D) 27% If = , then =
Internal growth rate = Plowback ratio * ROEBEG *
)10 = Plowback ratio * .18 * .75
Plowback ratio = .10/(.18 * .75) = .74 = 74%

Question 8

A firm's sustainable growth rate represents the:

Accepted Answer

A) Highest growth rate without decreasing the dividend 
B) Highest growth rate without increasing financial leverage 
C) Percentage change in sales times the profit margin 
D) Possible growth without jeopardizing net working capital Internal growth rate = plowback ratio x ROE x (equity/assets)
)06 = .41 x (.11 x asset turnover x 2) x .5
)06 = .2 x (.2 asset turnover)
)06/.04 = .04 asset turnover/.04 
A) Highest growth rate without decreasing the dividend 
B) Highest growth rate without increasing financial leverage 
C) Percentage change in sales times the profit margin 
D) Possible growth without jeopardizing net working capital Internal growth rate = plowback ratio x ROE x (equity/assets)
)06 = .41 x (.11 x asset turnover x 2) x .5
)06 = .2 x (.2 asset turnover)
)06/.04 = .04 asset turnover/.04

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Relative to its assets, a firm with a large volume of retained earnings and a high ROE:

Accepted Answer

A) Will have a larger than average net income 
B) Can generate a higher growth rate by raising more capital 
C) Should increase its payout ratio 
D) Can generate a higher growth rate without raising additional capital 
A) Will have a larger than average net income 
B) Can generate a higher growth rate by raising more capital 
C) Should increase its payout ratio 
D) Can generate a higher growth rate without raising additional capital

Question 11

Which of the following statements is correct concerning the internal growth rate?

Accepted Answer

A) It is maximized when the payout ratio equals zero 
B) It is maximized when the plowback ratio equals zero 
C) It cannot be less than the sustainable growth rate 
D) It decreases as total assets decrease 
A) It is maximized when the payout ratio equals zero 
B) It is maximized when the plowback ratio equals zero 
C) It cannot be less than the sustainable growth rate 
D) It decreases as total assets decrease

Question 12

If a firm's sales increased by 12% and it has no spare capacity, it must increase fixed assets by:

Accepted Answer

A) 0% 
B) 6% 
C) 9% 
D) 12% 
A) 0% 
B) 6% 
C) 9% 
D) 12%

Question 13

Which of the following will not permit a higher internal growth rate, other things equal?

Accepted Answer

A) A higher plowback ratio 
B) A higher debt-to-asset ratio 
C) A higher return on equity 
D) A higher return on assets 
A) A higher plowback ratio 
B) A higher debt-to-asset ratio 
C) A higher return on equity 
D) A higher return on assets

Question 14

Firms that maintain a constant ratio of debt-equity over a variable business cycle may find that:

Accepted Answer

A) Debt has grown too large, too fast 
B) It is more difficult to maintain a stable dividend 
C) Debt covenants always accommodate more debt, but often prevent debt prepayment 
D) Equity is always less expensive to obtain than debt 
A) Debt has grown too large, too fast 
B) It is more difficult to maintain a stable dividend 
C) Debt covenants always accommodate more debt, but often prevent debt prepayment 
D) Equity is always less expensive to obtain than debt

Question 15

Increased needs for net working capital are:

Accepted Answer

A) Recognized in pro forma balance sheets 
B) Absorbed into the pro forma plug figures 
C) Typically financed with debt 
D) Ignored due to their great variability 
A) Recognized in pro forma balance sheets 
B) Absorbed into the pro forma plug figures 
C) Typically financed with debt 
D) Ignored due to their great variability

Question 16

How will a percentage of sales model treat cost of goods sold if sales revenues are expected to grow by 20% to $1 million? Cost of goods sold will:

Accepted Answer

A) Grow at a slower rate than sales 
B) Remain proportionate to sales 
C) Be forecast to increase at the rate of inflation 
D) Increase to $800,000 
A) Grow at a slower rate than sales 
B) Remain proportionate to sales 
C) Be forecast to increase at the rate of inflation 
D) Increase to $800,000

Question 17

What new investment is required for a firm that projects 12% growth has $400,000 in assets, and retained earnings of $40,000?

Accepted Answer

A) $0 
B) $4,800 
C) $8,000 
D) $66,667 New investment = 0.12 x $400,000 
A) $0 
B) $4,800 
C) $8,000 
D) $66,667 New investment = 0.12 x $400,000

Question 18

A firm that wants to increase its sustainable growth rate can do so by __________ the __________ ratio or by __________ the __________ or both.

Accepted Answer

A) Increasing; payout; increasing; ROE 
B) Increasing; plowback; increasing; ROE 
C) Decreasing; plowback; increasing; ROE 
D) Decreasing; payout; decreasing; ROE 
A) Increasing; payout; increasing; ROE 
B) Increasing; plowback; increasing; ROE 
C) Decreasing; plowback; increasing; ROE 
D) Decreasing; payout; decreasing; ROE

Question 19

Which of the following statements is not true regarding financial planning models?

Accepted Answer

A) They should include as much detail as possible 
B) The results of a model are pro forma financial statements 
C) The plug variable maintains consistency 
D) Financial analysis is not used in financial planning 
A) They should include as much detail as possible 
B) The results of a model are pro forma financial statements 
C) The plug variable maintains consistency 
D) Financial analysis is not used in financial planning

Question 20

Financial planning models routinely adjust for present value and risk.

Accepted Answer

A) True 
 B)False

Exam 19: Short-Term Financial Planning

List and briefly describe the components of a financial planning model.

What is the maximum internal growth rate consistent with not requiring external funding for a firm reporting net income of $500,000, a dividend payout ratio of 40%, and total assets of $10 million?

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

If a firm chooses to maintain a fixed debt-equity ratio, they can raise the additional needed funds by:

An all equity financed firm has an asset turnover of 2, and its plowback ratio is 50%.Determine its Maximum payout ratio that will allow an 8% internally generated growth.

If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of .75 then:

A firm has a debt equity ratio of 1/3, and plans to grow at an annual rate of 10%.Its return on equity is 18%.What is the maximum payout ratio that a company can maintain without resorting to new equity issue?

A firm's sustainable growth rate represents the:

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

Relative to its assets, a firm with a large volume of retained earnings and a high ROE:

Which of the following statements is correct concerning the internal growth rate?

If a firm's sales increased by 12% and it has no spare capacity, it must increase fixed assets by:

Which of the following will not permit a higher internal growth rate, other things equal?

Firms that maintain a constant ratio of debt-equity over a variable business cycle may find that:

Increased needs for net working capital are:

How will a percentage of sales model treat cost of goods sold if sales revenues are expected to grow by 20% to $1 million? Cost of goods sold will:

What new investment is required for a firm that projects 12% growth has $400,000 in assets, and retained earnings of $40,000?

A firm that wants to increase its sustainable growth rate can do so by __________ the __________ ratio or by __________ the __________ or both.

Which of the following statements is not true regarding financial planning models?

Financial planning models routinely adjust for present value and risk.

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

Filters

A firm that wants to increase its sustainable growth rate can do so by the ratio or by the or both.