Chapter 03 Long term financial planning exercise answer

Chapter 03 Long-Term Financial Planning and Growth

Multiple Choice Questions

1. Which one of the following terms is applied to the financial planning method

which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values? A. percentage of sales method

B. sales dilution method

C. sales reconciliation method

D. common-size method

E. trend method

2. Which one of the following terms is defined as dividends paid expressed as a percentage of net income? A. dividend retention ratio

B. dividend yield

C. dividend payout ratio

D. dividend portion

E. dividend section

3. Which one of the following correctly defines the retention ratio? (5) A. one plus the dividend payout ratio

B. addition to retained earnings divided by net income

C. addition to retained earnings divided by dividends paid

D. net income minus additions to retained earnings

E. net income minus cash dividends

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4. The internal growth rate of a firm is best described as the:

A. minimum growth rate achievable assuming a 100 percent retention ratio.

B. minimum growth rate achievable if the firm maintains a constant equity multiplier.

C. maximum growth rate achievable excluding external financing of any kind.

D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

E. maximum growth rate achievable with unlimited debt financing.

5. The sustainable growth rate of a firm is best described as the:

A. minimum growth rate achievable assuming a 100 percent retention ratio.

B. minimum growth rate achievable if the firm maintains a constant equity multiplier.

C. maximum growth rate achievable excluding external financing of any kind.

D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

E. maximum growth rate achievable with unlimited debt financing.

6. You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only

B. II and III only

C. I, III, and IV only

D. II, III, and IV only

E. I, II, III, and IV

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7. Financial planning:

A. focuses solely on the short-term outlook for a firm.

B. is a process that firms employ only when major changes to a firm's operations are anticipated.

C. is a process that firms undergo once every five years.

D. considers multiple options and scenarios for the next two to five years.

E. provides minimal benefits for firms that are highly responsive to economic changes.

8. Financial planning accomplishes which of the following for a firm? I. determination of asset requirements

II. development of plans to contend with unexpected events III. establishment of priorities IV. analysis of funding options 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

9. A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume that the firm: (19)

A. is projected to grow at the internal rate of growth.

B. is projected to grow at the sustainable rate of growth.

C. currently has excess capacity.

D. is currently operating at full capacity.

E. retains all of its net income.

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10. A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by: (20) A. accounts payable.

B. long-term debt.

C. fixed assets.

D. retained earnings.

E. common stock.

11. A firm's external financing need is financed by which of the following? (30) 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

12. Which one of the following will cause the sustainable growth rate to equal to internal growth rate? (35)

A. dividend payout ratio greater than 1.0

B. debt-equity ratio of 1.0

C. retention ratio between 0.0 and 1.0

D. equity multiplier of 1.0

E. zero dividend payments

13. The sustainable growth rate: (36)

A. assumes there is no external financing of any kind.

B. assumes no additional long-term debt is available.

C. assumes the debt-equity ratio is constant.

D. assumes the debt-equity ratio is 1.0.

E. assumes all income is retained by the firm.

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14. Financial plans generally tend to ignore which one of the following? (40) A. dividend policy

B. manager's goals and objectives

C. risks associated with cash flows

D. operating capacity levels

E. capital structure policy

15. Wagner Industrial Motors, which is currently operating at full capacity, has sales of $29,000, current assets of $1,600, current liabilities of $1,200, net fixed assets of $27,500, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 4.5 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year? (45) A. -$259.75

B. -$201.19

C. $967.30

D. $1,099.08

E. $1,515.25

Projected assets = ($1,600 + $27,500) × 1.045 = $30,409.50 Projected liabilities = $1,200 × 1.045 = $1,254 Current equity = $1,600 + $27,500 - $1,200 = $27,900

Projected increase in retained earnings = $29,000 × .05 × 1.045 = $1,515.25 Equity funding need = $30,409.50 - $1,254 - $27,900 - $1,515.25 = -$259.75

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