Question 1

A firm can achieve a higher growth rate without raising external capital if it:

Accepted Answer

A)  increases its dividend payout ratio. 
B)  decreases its ROE. 
C)  decreases its debt-to-asset ratio. 
D) increases its financial leverage. 
A)  increases its dividend payout ratio. 
B)  decreases its ROE. 
C)  decreases its debt-to-asset ratio. 
D) increases its financial leverage. C

Question 2

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. D

Question 3

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

Accepted Answer

A)  4.50% 
B)  5.39% 
C)  8.00% 
D) 12.00% 
A)  4.50% 
B)  5.39% 
C)  8.00% 
D) 12.00% A

Question 4

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 5

Which one of the following will decrease the 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 6

If a firm with an asset base of $3 million recently added $150,000 to retained earnings after a dividend payment of $100,000, then its internal growth rate is:

Accepted Answer

A)  1.67%. 
B)  3.33%. 
C)  5.00%. 
D) 8.33%. 
A)  1.67%. 
B)  3.33%. 
C)  5.00%. 
D) 8.33%.

Question 7

Dawson Metals is currently operating at 94% of its capacity and has sales of $3.1 million and fixed assets of $2.8 million. How much should the firm budget for fixed asset purchases if sales are projected to increase by 9% next year?

Accepted Answer

A)  $0 
B)  $68,880 
C)  $43,616 
D) $98,407 
A)  $0 
B)  $68,880 
C)  $43,616 
D) $98,407

Question 8

A firm has sales of $1.2 million, a profit margin of 5%, and a dividend payout ratio of 25%. How much will be added to retained earnings next year if sales increase by 6%?

Accepted Answer

A)  $15,900 
B)  $21,600 
C)  $47,700 
D) $42,000 
A)  $15,900 
B)  $21,600 
C)  $47,700 
D) $42,000

Question 9

Contingency planning is:

Accepted Answer

A)  forecasting the most likely outcomes. 
B)  worrying about unlikely events. 
C)  working through the consequences of the plan under different scenarios. 
D) formulating responses to inevitable surprises. 
A)  forecasting the most likely outcomes. 
B)  worrying about unlikely events. 
C)  working through the consequences of the plan under different scenarios. 
D) formulating responses to inevitable surprises.

Question 10

A planning horizon refers to the amount of time necessary to develop the financial plan.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

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

Question 12

A firm currently has sales of $382,000 and net working capital of $45,840. Assume net working capital changes in direct proportion to sales. What will be the increase in net working capital if sales increase by 8%?

Accepted Answer

A)  $1,222 
B)  $2,809 
C)  $3,091 
D) $3,667 
A)  $1,222 
B)  $2,809 
C)  $3,091 
D) $3,667

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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 15

What is the sustainable growth rate for a firm with net income of $2.5 million, cash dividends of $1.5 million, and return on equity of 18%?

Accepted Answer

A)  3.0% 
B)  5.4% 
C)  7.2% 
D) 10.8% 
A)  3.0% 
B)  5.4% 
C)  7.2% 
D) 10.8%

Question 16

If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of 0.75 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 17

Over the long-term, firms that maintain a constant debt-equity ratio over a variable business cycle may find that:

Accepted Answer

A)  debt has grown too large, too fast. 
B)  it is difficult to maintain a stable dividend. 
C)  retained earnings are unnecessary. 
D) they can grow at a rate in excess of the sustainable rate. 
A)  debt has grown too large, too fast. 
B)  it is difficult to maintain a stable dividend. 
C)  retained earnings are unnecessary. 
D) they can grow at a rate in excess of the sustainable rate.

Question 18

The balancing items in a financial planning model are variables that adjust to maintain the consistency of a financial model. They are also known as plugs.

Accepted Answer

A) True 
 B)False

Question 19

Which one of the following changes will decrease a firm's internal growth rate?

Accepted Answer

A)  A decrease in dividends with a given net income 
B)  An increase in net income with a given dividend payout ratio 
C)  A decrease in the plowback ratio 
D) A decrease in assets with a set dividend payout ratio 
A)  A decrease in dividends with a given net income 
B)  An increase in net income with a given dividend payout ratio 
C)  A decrease in the plowback ratio 
D) A decrease in assets with a set dividend payout ratio

Question 20

Sources and uses of funds are made equal through:

Accepted Answer

A)  a balancing item. 
B)  pro forma financial statements. 
C)  borrowed cash. 
D) additions to retained earnings. 
A)  a balancing item. 
B)  pro forma financial statements. 
C)  borrowed cash. 
D) additions to retained earnings.

Exam 18: Long-Term Financial Planning

A firm can achieve a higher growth rate without raising external capital if it:

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:

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

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

Which one of the following will decrease the internal growth rate, other things equal?

If a firm with an asset base of $3 million recently added $150,000 to retained earnings after a dividend payment of $100,000, then its internal growth rate is:

Dawson Metals is currently operating at 94% of its capacity and has sales of $3.1 million and fixed assets of $2.8 million. How much should the firm budget for fixed asset purchases if sales are projected to increase by 9% next year?

A firm has sales of $1.2 million, a profit margin of 5%, and a dividend payout ratio of 25%. How much will be added to retained earnings next year if sales increase by 6%?

Contingency planning is:

A planning horizon refers to the amount of time necessary to develop the financial plan.

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

A firm currently has sales of $382,000 and net working capital of $45,840. Assume net working capital changes in direct proportion to sales. What will be the increase in net working capital if sales increase by 8%?

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

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?

What is the sustainable growth rate for a firm with net income of $2.5 million, cash dividends of $1.5 million, and return on equity of 18%?

If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of 0.75 then:

Over the long-term, firms that maintain a constant debt-equity ratio over a variable business cycle may find that:

The balancing items in a financial planning model are variables that adjust to maintain the consistency of a financial model. They are also known as plugs.

Which one of the following changes will decrease a firm's internal growth rate?

Sources and uses of funds are made equal through:

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

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