Deck 18: Long-Term Financial Planning

Question 1

Financial planning requires accurate and consistent forecasting.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Financial planning may incorporate scenario analysis as part of the planning process.

Answer 3

True

Question 4

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

Question 5

Individual capital investment projects are not considered in a financial plan unless they are very large.

Question 6

Financial planning focuses on the big picture.

Question 7

Financial planning should attempt to minimize risk.

Question 8

Adaptability is not a desirable feature in financial plans.

Question 9

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

Question 10

Financial planning is concerned with possible surprises as well as the most likely outcomes.

Question 11

A common, long-term corporate financial planning horizon would stretch for at least 15 to 20 years.

Question 12

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

Question 13

Pro formas are projected or forecasted financial statements.

Question 14

Debt can be used as a plug item in financial planning.

Question 15

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.

Question 16

Financial plans will rarely succeed unless the forecasts are perfect.

Question 17

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

Question 18

The sustainable growth rate is the rate at which the firm can grow without changing its leverage ratio.

Question 19

Financial planning just means formulating the company's response to the most likely events.

Question 20

Financial planning models must include as much detail as possible.

Question 21

The implications of the forecasts from a financial plan are determined by the:

A) plan inputs.
B) balancing item.
C) planning model.
D)plowback ratio.

Question 22

A firm has $4 million in total assets and $2.2 million in equity. How much of its $500,000 capital budget should be debt-financed to retain the same debt-equity ratio?

A) $50,000
B) $225,000
C) $275,000
D)$450,000

Question 23

Financial planning models routinely adjust for present value and risk.

Question 24

Which one of the following is not a reason for compiling financial plans?

A) Considering options
B) Contingency planning
C) Choosing the optimal plan
D)Forcing consistency

Question 25

A financial planning model will generally include all of the following except the:

A) listing of the firm's goals.
B) required increase in fixed assets.
C) projected sales.
D)forecast increase in retained earnings.

Question 26

If factories are operating below full capacity, sales can increase without investment in fixed assets. However, beyond some sales level, new capacity must be added and additional investment in fixed assets must be made.

Question 27

Calculate the rate at which a firm can grow without changing its leverage if its payout ratio is 70%, equity outstanding at the beginning of the year is $940,000, and its net income for the year is $162,000.

A) 5.17%
B) 11.67%
C) 14.00%
D)16.67%

Question 28

If sales growth for XYZ Corporation exceeds 6%, XYZ will need to seek external financing. This means that 6% is the:

A) external growth rate.
B) internal growth rate.
C) optimal growth rate.
D)sustainable growth rate.

Question 29

A planner's percentage of sales model forecasts that sales will grow by 20% next year. If costs of goods sold are proportionate at 70% of sales, then costs of goods sold will:

A) grow to 90% of sales.
B) grow in dollars by 70%.
C) not change in dollar amount.
D)increase by 20% in dollar terms.

Question 30

Financial models ensure consistency between growth assumptions and financing plans, and they identify the best financing plan.

Question 31

When a firm is said to have no spare capacity, it:

A) has no need for new employees.
B) currently has no inventory available for sale.
C) must issue new equity to grow.
D)must increase fixed assets to increase sales.

Question 32

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:

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 33

If a firm's dividend payout ratio is determined after achieving a specific capital structure, then:

A) dividends are an input to the financial plan.
B) the capital budget should be revised.
C) dividends are being used as a plug item.
D)dividend forecasts become crucial to planning.

Question 34

The decision to acquire fixed assets is unrelated to the current level of excess capacity.

Question 35

Planners often recommend entering a market for "strategic" reasons because the:

A) company is facing too much competition in its original market.
B) company may have valuable follow-on investments in the new market.
C) immediate investment has a positive net present value.
D)manager has a personal interest in a particular market.

Question 36

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

A) less likely to be effective.
B) using sales as a plug figure.
C) a percentage of sales model.
D)not adjusted for inflation.

Question 37

Pro formas refer to:

A) plans developed by a certified financial planner.
B) the inputs in the financial planning process.
C) projected financial statements.
D)deviations in results from previous financial plans.

Question 38

The firm's current financial statements would be included in:

A) the inputs of a financial plan.
B) the planning model for the financial plan.
C) the outputs of the financial plan.
D)no part of the financial plan.

Question 39

Which one of the following is not typically included among the three major components of a financial planning model?

A) Inputs: current financial statements, forecasts of key variables
B) Planning model: equations specifying key relationships
C) Outputs: pro formas, financial ratios, sources and uses of cash
D)Intuitions: common sense, guesses

Question 40

Outputs from a financial plan would include such items as:

A) sales growth forecasts.
B) a percentage of sales planning model.
C) a pro forma statement of sources and uses of cash.
D)the firm's current financial statements.

Question 41

What is the maximum internal growth rate for a firm reporting net income of $500,000, a dividend payout ratio of 40%, and total assets of $10 million?

A) 2%
B) 3%
C) 5%
D)6%

Question 42

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%?

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

Question 43

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

A) fixed assets depreciate over time.
B) fixed assets can be acquired only through external funding.
C) current assets can be acquired in smaller increments.
D)dollar for dollar, fixed assets are more expensive than current assets.

Question 44

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

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 45

The sustainable rate of growth assumes the:

A) debt-equity ratio is held constant.
B) market to book ratio increases.
C) dividend payout ratio decreases.
D)external debt remains constant.

Question 46

What is the required asset turnover for a firm with a 12% profit margin, 50% equity, and a 40% dividend payout that wishes to grow at 6% without increasing financial leverage?

A) 0.42
B) 0.56
C) 0.63
D)1.00

Question 47

A potential downfall of using dividends as the plug item is that:

A) it may send shareholders mixed signals.
B) dividends are constant within a planning horizon.
C) the firm may have to borrow cash to pay dividends.
D)shareholders may receive an excessive return.

Question 48

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

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

Question 49

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%?

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

Question 50

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:

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.

Question 51

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

A) increasing; payout; increasing; ROE
B) increasing; plowback; increasing; ROE
C) decreasing; plowback; increasing; ROE
D)decreasing; payout; decreasing; ROE

Question 52

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%?

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

Question 53

Alternative "what if?" scenarios can be easily accommodated in financial planning by use of:

A) sustainable growth models.
B) planning outputs.
C) spreadsheet programs.
D)bond covenants.

Question 54

What amount of debt should a firm include in its financing mix in order to achieve a sustainable growth rate of 9% while maintaining a 40% dividend payout, a 10% profit margin, and an asset turnover of 1.5?

A) 66.67% debt
B) 60.00% debt
C) 50.00% debt
D)Zero debt

Question 55

Financial plans covering a short planning horizon rarely extend beyond:

A) 1 year.
B) 3 years.
C) 5 years.
D)10 years.

Question 56

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) $200,000
B) $600,000
C) $800,000
D)$1,200,000

Question 57

What is the maximum dividend payout ratio consistent with not requiring external funds for a firm with an ROE of 15%, a debt-equity ratio of 40%, and an annual sales growth objective of 9%?

A) 1%
B) 10%
C) 12%
D)16%

Question 58

If the projected growth rate is smaller than the firm's sustainable growth rate:

A) it should increase its projected growth rate.
B) the firm will be required to decrease its plowback ratio.
C) its debt-equity ratio will decrease.
D)the firm will be required to increase borrowing.

Question 59

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:

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

Question 60

Contingency planning is:

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 61

Under which one of the following capital structures will a firm's internal growth rate exceed its sustainable growth rate?

A) Total debt-to-asset ratio equals 35%.
B) Equity-to-debt ratio equals 60%.
C) Equity-to-debt ratio equals 125%.
D)None of these.

Question 62

Which one of the following statements is correct concerning the internal growth rate?

A) It is maximized when the payout ratio equals zero.
B) It is maximized when the plowback ratio equals zero.
C) It cannot be less than the sustainable growth rate.
D)It decreases as total assets decrease.

Question 63

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

Question 64

The flexibility of financial plans is evident in the extent that:

A) actual profits will deviate from projected profits.
B) the plans can be adapted when conditions change.
C) use of the plans can be extended.
D)planning output is the same regardless of economic conditions.

Question 65

The outputs of a financial planning model often include:

A) the firm's current financial statements.
B) a range of macroeconomic forecasts.
C) the number of employees required.
D)projected financial statements of the firm.

Question 66

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) $1.00 million
B) $1.71 million
C) $2.29 million
D)$3.00 million

Question 67

The rate at which the assets of a firm can grow without the requirement of any external sources of financing is the:

A) internal growth rate.
B) sustainable growth rate.
C) pro forma growth rate.
D)plowback rate.

Question 68

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

A) is forward-looking.
B) relies on the viewpoints of management.
C) determines the rate of profitability.
D)is equally concerned with less likely outcomes.

Question 69

How much is required in external financing if first-stage pro forma statements indicate $1 million in net income, $300,000 in dividends, and a $900,000 increase in total assets?

A) $200,000
B) $500,000
C) $600,000
D)No external financing is required.

Question 70

How will a percentage of sales model treat cost of goods sold if sales revenues are expected to grow by 20% to $1 million next year? Cost of goods sold will:

A) grow at a slower rate than sales.
B) remain proportionate to sales.
C) be forecast to increase at the rate of inflation.
D)remain constant.

Question 71

First-stage pro forma balance sheets do not determine:

A) whether external financing is required.
B) the need for additional fixed assets.
C) the amount of the balancing item.
D)the financing mix for external funding.

Question 72

Which one of the following is most apt to occur if a financial plan shows sources of funds to be $100,000 and uses of funds to be $90,000?

A) External debt of $10,000 will be sought.
B) Dividend payments will be decreased by $10,000.
C) Cash balances will be increased by $10,000.
D)The capital budget will be decreased by $10,000.

Question 73

Which effort will help a firm boost its internal growth rate?

A) Plowing back a low proportion of its earnings
B) Achieving a high return on equity
C) Decreasing reinvested earnings
D)Maintaining a low sales-to-total assets ratio

Question 74

Which one of the following is correct when a firm's pro forma statements project a net income of $5,000 and an external financing requirement of $2,000?

A) Dividends cannot exceed $3,000.
B) Total assets cannot grow by more than $3,000.
C) Retained earnings cannot grow by more than $5,000.
D)The internal growth rate is 60%.

Question 75

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

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 76

Planners have determined that sales will increase by 20% next year, and the profit margin will remain at 10% of sales. Which one of the following statements is correct if the payout ratio remains at 30%?

A) Net income will increase by 10% next year.
B) The addition to retained earnings will increase by 20% next year.
C) The dividend will increase by 6% next year.
D)The addition to retained earnings will equal 6% of the sales increase next year.

Question 77

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

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 78

A firm has current sales of $2.4 million and fixed assets of $1.65 million. The firm is currently operating at 88% of capacity. How high can the firm's sales go without requiring any additional fixed assets?

A) $2.423 million
B) $2.509 million
C) $2.727 million
D)$2.836 million

Question 79

The final variable to have its value determined in a financial plan is often referred to as the:

A) net income.
B) balancing item.
C) retained earnings plowback.
D)growth forecast.

Question 80

Increased needs for net working capital are:

A) recognized in pro forma balance sheets.
B) totally absorbed by retained earnings.
C) typically financed with short-term debt.
D)ignored due to their great variability.