maximum growth rate achievable without using any external equity financing while maintaining a constant debt-equity ratio.. SECTION: 4.4 TOPIC: INTERNAL GROWTH RATE TYPE: DEFINITIONS 8..
Trang 1Multiple Choice Questions
1 The long-range time period, usually the next two to five years, over which the financial planning process focuses is known as the:
Trang 24 The dividend payout ratio is calculated as:
a net income minus additions to retained earnings
b cash dividends divided by the change in retained earnings
C cash dividends divided by net income.
d net income minus cash dividends
e one plus the retention ratio
SECTION: 4.3
TOPIC: DIVIDEND PAYOUT RATIO
TYPE: DEFINITIONS
5 The retention ratio is calculated as:
a one plus the dividend payout ratio
B the additions to retained earnings divided by net income.
c the additions to retained earnings divided by dividends paid
d net income minus additions to retained earnings
e net income minus cash dividends
SECTION: 4.3
TOPIC: RETENTION RATIO
TYPE: DEFINITIONS
6 The capital intensity ratio is the:
a ratio of fixed assets to current assets
b ratio of total assets to total equity
c amount of fixed assets required to generate $1 in sales
D amount of total assets required to generate $1 in sales.
e the amount of sales generated from every $1 in total assets
SECTION: 4.3
TOPIC: CAPITAL INTENSITY RATIO
TYPE: DEFINITIONS
Trang 37 The internal growth rate of a firm is best described as the:
a minimum growth rate achievable if the firm does not pay out any cash dividends
b minimum growth rate achievable if the firm maintains a constant equity multiplier
C maximum growth rate achievable without external financing of any kind.
d maximum growth rate achievable without using any external equity financing while maintaining a constant debt-equity ratio
e maximum growth rate achievable without any limits on the level of debt financing
SECTION: 4.4
TOPIC: INTERNAL GROWTH RATE
TYPE: DEFINITIONS
8 The sustainable growth rate of a firm is best described as the:
a minimum growth rate achievable if the firm does not pay out any cash dividends
b minimum growth rate achievable if the firm maintains a constant equity multiplier
c maximum growth rate achievable without external financing of any kind
D maximum growth rate achievable without using any external equity financing while
maintaining a constant debt-equity ratio
e maximum growth rate achievable without any limits on the level of debt financing
II net working capital decision
III capital budgeting decision
IV capital structure policy
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
SECTION: INTRODUCTION
TOPIC: FINANCIAL PLANNING ELEMENTS
TYPE: CONCEPTS
Trang 410 Financial planning:
a focuses solely on the short-term outlook for a firm
b forecasts the financial position of a firm on a divisional basis only
C generally forecasts the financial position of a firm for the next two to five years.
d is a process that firms undergo once every five years
e is limited to projecting the net income of a firm over the planning horizon
SECTION: 4.1
TOPIC: FINANCIAL PLANNING
TYPE: CONCEPTS
11 Financial planning:
a encourages managers to separate their goals from their plans
b is generally based on the best-case scenario
c is beneficial to smaller firms but has limited value to larger firms
D helps managers establish priorities.
e prevents firms from encountering surprise events
Trang 513 One of the primary benefits of aggregation is gaining an understanding of the:
a interactions of the net working capital
B total investment needs of the firm.
c trade-offs between debt and equity
d trade-offs between the dividend policy and the plowback ratio
e total asset turnover ratio
SECTION: 4.1
TOPIC: AGGREGATION
TYPE: CONCEPTS
14 Which one of the following is a benefit of financial planning?
a determining the amount of debt required over the planning horizon with absolute certainty
b knowing with certainty the amount of sales that will be generated over the planning horizon
c avoiding all surprises during the planning horizon
d allowing growth to exceed the financing available for that growth
E ascertaining the feasibility of a firm's goals
SECTION: 4.1
TOPIC: FEASIBILITY
TYPE: CONCEPTS
15 Pro forma financial statements are:
I generally based on projected sales
II guarantees of future performance
III the output from a financial planning model
IV projections of a firm's future financial position
Trang 616 When utilizing the percentage of sales approach, managers:
I determine the level of sales required based on the desired profit margin percentage
II need to identify which expenses are variable and which are fixed
III need to determine the capital intensity ratio
IV can ignore any projected dividends
a I and II only
B II and III only
c III and IV only
d I, II, and IV only
e I, III, and IV only
SECTION: 4.3
TOPIC: PERCENTAGE OF SALES APPROACH
TYPE: CONCEPTS
17 Sales forecasts are:
I frequently based on macroeconomic projections
II often influenced by industry forecasts
III critical to the reliability of pro forma financial statements
IV generally the basis for projecting future asset requirements
a I and II only
b III and IV only
c II and III only
d I, II, and III only
E I, II, III, and IV
SECTION: 4.2
TOPIC: SALES FORECASTS
TYPE: CONCEPTS
Trang 718 When constructing a pro forma statement, net working capital generally:
a remains fixed
b varies only when the firm is producing at full capacity
c varies only if the firm maintains a fixed debt-equity ratio
d varies only if the firm is producing at less than full capacity
E varies proportionately with sales.
SECTION: 4.3
TOPIC: PRO FORMA STATEMENTS
TYPE: CONCEPTS
Trang 819 When fixed assets on a pro forma statement are projected to increase at a rate equivalent
to the projected rate of sales growth, it can be assumed that the firm is:
a projected to grow at the internal rate of growth
b projected to grow at the sustainable rate of growth
c creating excess capacity
D currently operating at full capacity.
e retaining all of its projected net income
a net working capital policies
B financing and dividend policies.
c desired level of liquidity
d capital budgeting and working capital policies
e level of capacity utilization and net working capital policy
Trang 922 You are comparing the current income statement of a firm along with a pro forma income statement for next year The pro forma is based on a five percent increase in sales The firm is currently operating at 82 percent of capacity Net working capital and all costs vary directly with sales The tax rate and the dividend payout ratio are fixed Given this,:
a the net income shown on both statements is identical
b the tax rate is assumed to increase at the same rate as the sales
C the common size income statements for both years will be identical.
d next year's increase in retained earnings will equal this year's increase in retained earnings
e total assets are required to also increase at a rate equal to the rate of sales growth
SECTION: 4.3
TOPIC: PRO FORMA STATEMENTS
TYPE: CONCEPTS
23 Which of the following statements concerning pro forma financials are correct?
I The pro forma level of sales should consider macroeconomic forecasts
II Pro forma statements should consider both the capital structure and the dividend policies ofthe firm
III A pro forma balance sheet must always maintain a fixed debt-equity ratio
IV A pro forma balance sheet must always consider the operating capacity level
a I and II only
b III and IV only
c I, III, and IV only
d I, II, and III only
E I, II, and IV only
SECTION: 4.3
TOPIC: PRO FORMA STATEMENTS
TYPE: CONCEPTS
Trang 1024 Which one of the following is required to create pro forma financial statements?
A current capacity level of operations must be known
b debt-equity ratio must be constant
c dividend amount must be constant
d all expenses must vary directly with sales
e firm must be projected to operate at full capacity
SECTION: 4.3
TOPIC: PRO FORMA STATEMENTS
TYPE: CONCEPTS
Trang 1125 Which of the following must you know to determine the fixed assets required to support a given level of sales?
I current amount of fixed assets
II current sales
III current level of operating capacity
IV projected growth rate of sales
a I and III only
b II and IV only
C I, II, and III only
d II, III, and IV only
e I, II, III, and IV
SECTION: 4.3
TOPIC: PRO FORMA STATEMENTS
TYPE: CONCEPTS
26 The plowback ratio:
a is equal to net income divided by the change in total equity
B shows the percentage of net income available to the firm for future growth.
c plus the retention ratio must equal one hundred percent
d is equal to the change in retained earnings divided by the dividends paid
e represents the earnings returned to the shareholders
SECTION: 4.3
TOPIC: PLOWBACK RATIO
TYPE: CONCEPTS
Trang 1227 Alpha and Beta are two firms that are equal in every way except for their dividend payout ratios Alpha has a 30 percent payout ratio while Beta has a 40 percent payout ratio Given this difference,:
a Alpha's profit margin next year will exceed the Beta's profit margin
b Alpha and Beta will continue to grow at the same rate over the next five years assuming neither firm utilizes any external financing
c Alpha's plowback ratio is less than Beta's plowback ratio
D Alpha has higher internal rate of growth than does Beta.
e Alpha has a lower sustainable rate of growth than does Beta
SECTION: 4.4
TOPIC: PAYOUT RATIO
TYPE: CONCEPTS
Trang 1328 Which one of the following statements concerning the capital intensity ratio is correct?
a The capital intensity ratio is equal to sales divided by total assets
b The lower the capital intensity ratio, the greater the amount of assets required to support each dollar of sales
c A highly capital-intensive firm will have a low capital intensity ratio
d The capital intensity ratio is the amount of sales generated from each dollar of total assets
E The capital intensity ratio is the amount of total assets required to generate one dollar of
statements Which one of the following values should be unchanged from this year?
30 Any external financing needed is generally covered by:
a the net income retained by the firm
b adjusting accounts payable
c adjusting the projected cash balance
D adjusting the level of debt and/or equity.
e the projected operating cash flow
SECTION: 4.4
TOPIC: EXTERNAL FINANCING NEED
TYPE: CONCEPTS
Trang 1531 Sales can often increase without increasing which one of the following?
a net working capital
b cost of goods sold
33 All else equal, the internal growth rate increases when the:
a retention ratio decreases
b dividend payout ratio increases
c net income decreases
D total assets decrease.
e plowback ratio decreases
SECTION: 4.4
TOPIC: INTERNAL GROWTH RATE
TYPE: CONCEPTS
Trang 1634 The external financing needed:
A will decrease if the projected level of sales is decreased.
b is unaffected by the dividend payout ratio
c must be funded by debt financing
d is prior to considering any potential increase in retained earnings
e assumes a firm is operating at full capacity
SECTION: 4.3
TOPIC: EXTERNAL FINANCING NEEDED
TYPE: CONCEPTS
35 The sustainable growth rate will be equivalent to the internal growth rate when:
A a firm has no debt.
b the projected growth rate is equal to the internal growth rate
c the plowback ratio is positive but less than one
d a firm has a debt-equity ratio exactly equal to one
e the dividend payout ratio is zero
SECTION: 4.4
TOPIC: SUSTAINABLE GROWTH RATE
TYPE: CONCEPTS
36 The sustainable growth rate:
a assumes there is no external financing of any kind
B is normally higher than the internal growth rate.
c assumes the debt-equity ratio is variable
d is based on receiving additional external debt and equity financing
e assumes that all income is retained by the firm
SECTION: 4.4
TOPIC: SUSTAINABLE GROWTH RATE
TYPE: CONCEPTS
Trang 1737 If a firm bases its growth projection on the rate of sustainable growth, and has positive netincome, then the:
a fixed assets will have to increase at the same rate, regardless of the current capacity level
b number of common shares outstanding will increase at the same rate of growth
c debt-equity ratio will have to increase
D debt-equity ratio will remain constant while retained earnings increase.
e fixed assets, debt-equity ratio, and number of common shares outstanding will all increase
at the same rate
a 25 percent of the internal rate of growth
b 25 percent of the sustainable rate of growth
c the internal rate of growth
D the sustainable rate of growth.
e 75 percent of the profit margin
SECTION: 4.4
TOPIC: SUSTAINABLE GROWTH RATE
TYPE: CONCEPTS
Trang 1839 Which of the following can affect a firm's sustainable rate of growth?
I total asset turnover
II profit margin
III dividend policy
IV equity multiplier
a III only
b I and III only
c II, III, and IV only
d I, II, and IV only
E I, II, III, and IV
SECTION: 4.4
TOPIC: DETERMINANTS OF GROWTH
TYPE: CONCEPTS
40 One of the primary advantages of financial planning is that it:
a concentrates solely on profits
B reconciles planned activities with company priorities.
c establishes the highest possible growth rate at any cost
d limits expansion to the maximum achievable internal rate of growth
e eliminates future surprises and unplanned activities
SECTION: 4.5
TOPIC: FINANCIAL PLANNING
TYPE: CONCEPTS
41 One of the primary weaknesses of many financial planning models is that they:
a rely too much on financial relationships and too little on accounting relationships
b are iterative in nature
c ignore the goals and objectives of senior management
d are based solely on best case assumptions
E ignore the size, risk, and timing of cash flows.
Trang 1942 Financial planning:
I is an on-going process
II must consider the constraints that exist both internally and externally
III helps a firm establish priorities
IV reconciles the activities of the various departments within a firm
a III and IV only
b II and III only
c I, II, and IV only
d II, III, and IV only
E I, II, III, and IV
SECTION: 4.1 AND 4.5
TOPIC: FINANCIAL PLANNING MODELS
TYPE: CONCEPTS
43 A Procrustes approach to financial planning requires:
a a firm to produce a financial plan just once every ten years or so
b little, if any, input from upper-level management
C the planning staff to develop a plan which meets the goals set forth by upper-level
managers
d a firm to increase its capital intensity ratio
e a firm to remain at its current level of fixed assets
SECTION: 4.1 AND 4.5
TOPIC: FINANCIAL PLANNING
TYPE: CONCEPTS
Trang 2044 Suppliers, Inc has current sales of $2,400 and a profit margin of 9 percent The firm estimates that sales will decrease by 4 percent next year and that all costs will vary in direct relationship to sales What is the pro forma net income?
liabilities, and costs vary directly with sales, how much additional equity financing is requiredfor next year?
Projected increase in retained earnings = $3,000 .06 1.09 = $196.20
Equity funding need = $2,943 $436 $2,300 $196.20 = $10.80
Trang 2146 Coffee Brewers expects sales of $1,500 next year The profit margin is 5 percent and the firm has a 70 percent dividend payout ratio What is the projected increase in retained earnings?
Change in retained earnings = $1,500 .05 (1 .70) = $22.50
AACSB TOPIC: ANALYTIC
Trang 2248 Jed's Designer Clothes has $1,800 of sales and $1,630 of total assets The firm is operating
at 75 percent of capacity What is the capital intensity ratio at full capacity?
Full-capacity sales = $1,800 / 75 = $2,400; Capital intensity ratio = $1,630 / $2,400 = 68
AACSB TOPIC: ANALYTIC
SECTION: 4.3
TOPIC: CAPITAL INTENSITY RATIO
TYPE: PROBLEMS
49 ABC, Inc is operating at full capacity with a sales level of $1,400 and fixed assets of
$700 What is the required addition to fixed assets if sales are to increase by 10 percent?
Required addition to fixed assets = $700 .10 = $70; Or, Capital intensity ratio = $700 /
$1,400 = 50; Required addition to fixed assets = $1,400 .10 .50 = $70
AACSB TOPIC: ANALYTIC
SECTION: 4.3
TOPIC: CAPITAL INTENSITY RATIO
TYPE: PROBLEMS