Exam 18: Long-Term Financial Planning

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?

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?

For a firm with $3 million in total assets,$400,000 in net income,and $150,000 in dividend payments,first calculate the maximum rate of growth in sales without tapping external sources of funds.Next,show how that growth rate changes if the dividend payout ratio is reduced to 20%.Do these two points suggest that shareholders must be willing to trade dividends for growth?

Financial planning models must include as much detail as possible.

Dividend policy is determined by all of the following except:

A typical horizon for long-term planning is 5 years.

Percentage of sales models are planning models in which the sales forecasts are the driving variables and most other variables are proportional.

Financial planning is a process of deciding which risks to take.

A major difference between financial planning and forecasting is that financial planning:

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

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 forecast using a percentage of sales model expects sales to increase by 5% annually over the next 4 years.If costs are proportional to sales at 80%,and last year's sales were $1,000,the net income in the fourth year will be:

The observation that additions to fixed assets are "lumpier" than additions to current assets indicates that:

Financial plans draw out the connections between:

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

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

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?

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

When most of the elements of a financial plan are related to sales levels,the plan is:

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