Question 1

Which of the following questions are appropriate to address during the financial planning process?
I. Should the firm merge with a competitor?
II. Should additional shares of stock be sold?
III. Should a particular division be sold?
IV. Should a new product be introduced?

Accepted Answer

A)  I only 
B)  II and III only 
C)  I and II only 
D)  I, II, and III only 
E)  I, II, III, and IV

Question 2

Fix-It Co. wishes to maintain a growth rate of 9.89 percent a year, a constant debt-equity ratio of .42, and a dividend payout ratio of 40 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve?

Accepted Answer

A)  8.13 percent 
B)  13.46 percent 
C)  13.73 percent 
D)  14.33 percent 
E)  14.74 percent

Question 3

Marco's has current annual sales of $52,600, net fixed assets of $38,900, and total assets of $56,300. The firm is currently operating at 79 percent of capacity. What is the capital intensity ratio at full capacity?

Accepted Answer

A)  1.18 
B)  1.10 
C)  0.96 
D)  0.91 
E)  0.85

Question 4

Financial planning includes the:
I. determination of asset requirements.
II. development of contingency plans.
III. establishment of priorities.
IV. analysis of funding options.

Accepted Answer

A)  I and III only 
B)  II and IV only 
C)  I, III, and IV only 
D)  I, II, and III only 
E)  I, II, III, and IV

Question 5

Leon's has a total asset turnover of 1.46 percent, a profit margin of 8 percent, an equity multiplier of 1.2, and a dividend payout ratio of 32 percent. What is the sustainable growth rate?

Accepted Answer

A)  10.30 percent 
B)  10.53 percent 
C)  10.67 percent 
D)  10.89 percent 
E)  11.01 percent

Question 6

The sustainable growth rate of a firm is best described as the ________ growth rate achievable ________.

Accepted Answer

A)  minimum; assuming a 100 percent retention ratio 
B)  minimum; if the firm maintains a constant equity multiplier 
C)  maximum; excluding external financing of any kind 
D)  maximum; excluding any external equity financing while maintaining a constant debt-equity ratio 
E)  maximum; with unlimited debt financing

Question 7

The retention ratio can be computed as:

Accepted Answer

A)  1 − Plowback ratio. 
B)  Change in retained earnings/Cash dividends. 
C)  1 + Dividend payout ratio. 
D)  (Change in retained earnings + Cash dividends)/Net income. 
E)  1 − (Cash dividends/Net income).

Question 8

Worthington Industries is currently operating at full-capacity sales. Thus, sales are currently being limited by the firm's:

Accepted Answer

A)  net working capital. 
B)  long-term debt. 
C)  inventory. 
D)  fixed assets. 
E)  debt-equity ratio.

Question 9

Seaweed Mfg. is currently operating at only 84 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed?

Accepted Answer

A)  17.23 percent 
B)  17.47 percent 
C)  18.03 percent 
D)  18.87 percent 
E)  19.05 percent

Question 10

The portion of net income that a firm reinvests in itself is called the:

Accepted Answer

A)  retention ratio. 
B)  dividend yield. 
C)  dividend payout ratio. 
D)  internal growth rate. 
E)  cash influx ratio.

Question 11

Rural Markets has $878,000 of sales and $913,000 of total assets. The firm is operating at 93 percent of capacity. What is the capital intensity ratio at full capacity?

Accepted Answer

A)  0.62 
B)  0.88 
C)  0.97 
D)  1.03 
E)  1.14

Question 12

Wood Products is operating at 87 percent capacity and earning a substantial profit. A sales increase is least apt to increase the firm's:

Accepted Answer

A)  accounts receivable. 
B)  cost of goods sold. 
C)  accounts payable. 
D)  fixed assets. 
E)  inventory.

Question 13

Basic Motors has a profit margin of 5.6 percent, a total asset turnover of 1.76, a total debt ratio of .2, and a dividend payout ratio of .7. What is the sustainable growth rate?

Accepted Answer

A)  4.68 percent 
B)  3.84 percent 
C)  2.12 percent 
D)  3.49 percent 
E)  4.41 percent

Question 14

A firm's external financing need is met by:

Accepted Answer

A)  retained earnings. 
B)  net working capital and retained earnings. 
C)  net income and retained earnings. 
D)  debt or equity. 
E)  owners' equity, including retained earnings.

Question 15

Hench's has annual sales of $56,900 is currently operating at 86 percent of capacity. What is the full-capacity level of sales?

Accepted Answer

A)  $48,934 
B)  $47,740 
C)  $66,163 
D)  $105,834 
E)  $64,866

Question 16

Buster's Market earns a profit and has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its long-term debt at this time. Which one of the following defines the maximum rate at which this firm can currently grow?

Accepted Answer

A)  Internal growth rate (1 − .30) 
B)  Sustainable growth rate (1 − .30) 
C)  Internal growth rate 
D)  Sustainable growth rate 
E)  Zero percent

Question 17

A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of the following account values when compiling pro forma statements?

Accepted Answer

A)  Sales 
B)  Cost of goods sold 
C)  Accounts receivable 
D)  Fixed assets 
E)  Long-term debt

Question 18

The internal growth rate of a firm is best described as the ________ growth rate achievable ________.

Accepted Answer

A)  minimum; assuming a retention ratio of 100 percent 
B)  minimum; if the firm maintains a constant equity multiplier 
C)  maximum; excluding external financing of any kind 
D)  maximum; excluding any external equity financing while maintaining a constant debt-equity ratio 
E)  maximum; with unlimited debt financing

Question 19

BJ Company's net working capital and all of its expenses vary directly with sales. The firm is currently operating at 86 percent of capacity. The firm wants no additional external financing of any kind. The tax rate is 21 percent and the dividend payout ratio is fixed at 25 percent. Which statement related to next year's pro forma statements must be correct?

Accepted Answer

A)  Total equity will remain constant at this year's ending value. 
B)  The maximum rate of sales increase is four percent. 
C)  The firm cannot exceed its internal rate of growth. 
D)  Accounts payable will increase at the same rate as fixed assets. 
E)  Inventory will remain constant at the current level.

Question 20

The Steel Mill is currently operating at 84 percent of capacity. Annual sales are $28,400 and net income is $2,250. The firm has current liabilities of $2,700, long-term debt of $9,800, net fixed assets of $16,900, net working capital of $5,000, and owners' equity of $12,100. All costs and net working capital vary directly with sales. The tax rate and profit margin will remain constant. The dividend payout ratio is constant at 40 percent. How much additional debt is required if no new equity is raised and sales are projected to increase by 12 percent?

Accepted Answer

A)  −$810 
B)  −$912 
C)  −$642 
D)  $264 
E)  $358

Exam 4: Long-Term Financial Planning and Growth

Which of the following questions are appropriate to address during the financial planning process? I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced?