Question 1

Describe the percentage of sales model and its potential pitfalls in the financial planning process.

Accepted Answer

The percentage of sales model is commonl

Question 2

A firm with 30% total debt ratio, total assets of $10 million, and an ROE of 14% has been paying out 60% of earnings to shareholders in the form of dividends.Sales are expected to increase by 10% this year, a faster growth rate than usual.Will external funding be required under these conditions? Will the debt-equity ratio remain constant?

Accepted Answer

Yes, external funds will be required in

Question 3

Comebaq Computers is aiming to increase its market share by slashing the price of its new range of personal computers.Are costs and assets likely to increase or decrease as a proportion of sales? Explain.

Accepted Answer

If the firm reduces prices, sales revenu

Question 4

With respect to the balance sheet, an increase in equity of $2,000 with an increase in net income to $2,500, leads us to believe:

Accepted Answer

A) The firm paid a dividend of $500 
B) The firm plowed $500 back into the company 
C) $500 went into retained earning 
D) Debt increased by $2,000 
A) The firm paid a dividend of $500 
B) The firm plowed $500 back into the company 
C) $500 went into retained earning 
D) Debt increased by $2,000

Question 5

Which of the following might indicate the correct choice of a plug figure if a financial plan shows sources of funds to be $100,000 and uses of funds to be $90,000?

Accepted Answer

A) External debt must increase by $10,000 
B) Dividend payments must decrease by $10,000 
C) Cash balances must increase by $10,000 
D) The capital budget must decrease by $10,000 
A) External debt must increase by $10,000 
B) Dividend payments must decrease by $10,000 
C) Cash balances must increase by $10,000 
D) The capital budget must decrease by $10,000

Question 6

A firm's goal is to maintain a 75% debt-equity ratio.How much equity would be required if the results of a financial planning model indicate that the firm's assets will grow to $4 million?

Accepted Answer

A) $1.00 million 
B) $1.71 million 
C) $2.29 million 
D) $3.00 million If debt is 75% as large as equity, then:
1)75 equity = $4.0 million 
A) $1.00 million 
B) $1.71 million 
C) $2.29 million 
D) $3.00 million If debt is 75% as large as equity, then:
1)75 equity = $4.0 million

Question 7

A firm has $1 million in current sales volume and an internal growth rate of 15% .If sales are expected to increase by $100,000, then:

Accepted Answer

A) The firm's forecast will not be met 
B) Dividends will have to be reduced 
C) Retained earnings will increase by $50,000 
D) External funding will not be required 
A) The firm's forecast will not be met 
B) Dividends will have to be reduced 
C) Retained earnings will increase by $50,000 
D) External funding will not be required

Question 8

How are financial planning models constructed?

Accepted Answer

Financial planning proceeds by trial and

Question 9

What is the internal growth rate for a firm with an ROE of 20%, a dividend payout ratio of 40%, and an equity-debt ratio of 60%?

Accepted Answer

A) 4.50% 
B) 5.39% 
C) 8.00% 
D) 12.00% internal growth rate = plowback x ROE x equity/assets
= )6 x .2 x (60/160)
= )12 x .375 
A) 4.50% 
B) 5.39% 
C) 8.00% 
D) 12.00% internal growth rate = plowback x ROE x equity/assets
= )6 x .2 x (60/160)
= )12 x .375

Question 10

The purpose of debt covenants is to:

Accepted Answer

A) Prohibit borrowers from certain risky behaviour 
B) Determine the optimal borrowing amount 
C) Minimize the interest expense 
D) Hasten the repayment of the loan 
A) Prohibit borrowers from certain risky behaviour 
B) Determine the optimal borrowing amount 
C) Minimize the interest expense 
D) Hasten the repayment of the loan

Question 11

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

Accepted Answer

A) It increases as ROE decreases 
B) It increases as the payout ratio decreases 
C) It is maximized when the plowback ratio equals zero 
D) It is always less than the internal growth rate 
A) It increases as ROE decreases 
B) It increases as the payout ratio decreases 
C) It is maximized when the plowback ratio equals zero 
D) It is always less than the internal growth rate

Question 12

A firm's internal growth rate of 10% means that:

Accepted Answer

A) Sales can grow by 10% before external equity is needed 
B) Retained earnings can increase by 10% before total assets will change 
C) External capital will not be required unless sales growth exceeds 10% 
D) Debt can increase by 10% before retained earnings will fall 
A) Sales can grow by 10% before external equity is needed 
B) Retained earnings can increase by 10% before total assets will change 
C) External capital will not be required unless sales growth exceeds 10% 
D) Debt can increase by 10% before retained earnings will fall

Question 13

Percentage of sales models usually assume that costs, fixed assets, and working capital all increase at the same rate as sales.When do you think that these assumptions do not make sense? Would you feel happier using a percentage of sales model for short-term or long-term planning?

Accepted Answer

percentage of sales models assume that m

Question 14

Which statement is correct for a firm that forecasts net income of $200,000 and a reduction in retained earnings of $50,000?

Accepted Answer

A) Dividends will total $150,000 
B) The plowback ratio is 25% 
C) The payout ratio exceeds 1.0 
D) This combination of account changes cannot occur 
A) Dividends will total $150,000 
B) The plowback ratio is 25% 
C) The payout ratio exceeds 1.0 
D) This combination of account changes cannot occur

Question 15

If a firm's dividend payout ratio is determined after achieving a specific capital structure, then:

Accepted Answer

A) Dividends are an input to the financial plan 
B) The capital budget should be revised 
C) Dividends are being used as a plug item 
D) Dividend forecasts become crucial to planning 
A) Dividends are an input to the financial plan 
B) The capital budget should be revised 
C) Dividends are being used as a plug item 
D) Dividend forecasts become crucial to planning

Question 16

Calculate the sustainable growth rate for a firm with an 8% profit margin, an asset turnover of 1.25, a total debt ratio of 45%, and a plowback ratio of 65%.Assuming that the ROE remains constant, how large can the sustainable growth rate become?

Accepted Answer

Sustainable growth = plowback ration * R

Question 17

If a firm uses external financing as a plug item, has a new capital budget of $2 million, a net income of $3 million, and a plowback ratio of 40%, how much should be raised in external funds?

Accepted Answer

A) $200,000 
B) $600,000 
C) $800,000 
D) $1,200,000 Plowback = $3 million x .40 = $1.2 million 
A) $200,000 
B) $600,000 
C) $800,000 
D) $1,200,000 Plowback = $3 million x .40 = $1.2 million

Question 18

The effects of a change in sales on working capital will be seen in which section of a financial plan:

Accepted Answer

A) Output section 
B) Pro forma financial statements 
C) Planning model 
D) Sources and uses of funds 
A) Output section 
B) Pro forma financial statements 
C) Planning model 
D) Sources and uses of funds

Question 19

Financial planning focuses on the big picture.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is correct when a firm's pro forma statements project a net income of $5,000 and an external financing requirement of $2,000?

Accepted Answer

A) Dividends cannot exceed $3,000 
B) Total assets cannot grow by more than $3,000 
C) Retained earnings cannot grow by more than $5,000 
D) The internal growth rate is 60% 
A) Dividends cannot exceed $3,000 
B) Total assets cannot grow by more than $3,000 
C) Retained earnings cannot grow by more than $5,000 
D) The internal growth rate is 60%

Exam 19: Short-Term Financial Planning

Describe the percentage of sales model and its potential pitfalls in the financial planning process.

Comebaq Computers is aiming to increase its market share by slashing the price of its new range of personal computers.Are costs and assets likely to increase or decrease as a proportion of sales? Explain.

With respect to the balance sheet, an increase in equity of $2,000 with an increase in net income to $2,500, leads us to believe:

Which of the following might indicate the correct choice of a plug figure if a financial plan shows sources of funds to be $100,000 and uses of funds to be $90,000?

A firm's goal is to maintain a 75% debt-equity ratio.How much equity would be required if the results of a financial planning model indicate that the firm's assets will grow to $4 million?

A firm has $1 million in current sales volume and an internal growth rate of 15% .If sales are expected to increase by $100,000, then:

How are financial planning models constructed?

What is the internal growth rate for a firm with an ROE of 20%, a dividend payout ratio of 40%, and an equity-debt ratio of 60%?

The purpose of debt covenants is to:

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

A firm's internal growth rate of 10% means that:

Percentage of sales models usually assume that costs, fixed assets, and working capital all increase at the same rate as sales.When do you think that these assumptions do not make sense? Would you feel happier using a percentage of sales model for short-term or long-term planning?

Which statement is correct for a firm that forecasts net income of $200,000 and a reduction in retained earnings of $50,000?

If a firm's dividend payout ratio is determined after achieving a specific capital structure, then:

Calculate the sustainable growth rate for a firm with an 8% profit margin, an asset turnover of 1.25, a total debt ratio of 45%, and a plowback ratio of 65%.Assuming that the ROE remains constant, how large can the sustainable growth rate become?

If a firm uses external financing as a plug item, has a new capital budget of $2 million, a net income of $3 million, and a plowback ratio of 40%, how much should be raised in external funds?

The effects of a change in sales on working capital will be seen in which section of a financial plan:

Financial planning focuses on the big picture.

Which of the following is correct when a firm's pro forma statements project a net income of $5,000 and an external financing requirement of $2,000?

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

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