Deck 4: Managing Growth

Question 1

Share repurchases usually decrease earnings per share.

Answer 1

False

Question 2

The retention ratio is:

A) equal to net income divided by the change in total equity.
B) the percentage of net income available to the firm to fund future growth.
C) equal to one minus the asset turnover ratio.
D) the change in retained earnings divided by the dividends paid.
E) the dollar increase in net income divided by the dollar increase in sales.

Answer 2

the percentage of net income available to the firm to fund future growth.

Question 3

Which of these ratios are the determinants of a firm's sustainable growth rate?
I.Assets-to-equity ratio
II.Profit margin
III.Retention ratio
IV.Asset turnover ratio

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

Answer 3

I,II,III,and IV

Question 4

The sustainable growth rate:

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.

Question 5

Which of the following can affect a firm's sustainable rate of growth?
I.Asset turnover ratio
II.Profit margin
III.Dividend policy
IV.Financial leverage

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

Question 6

The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.

Question 7

Issue costs of equity are high relative to those of debt.

Question 8

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.

Question 9

Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process?
I.Should the firm merge with a competitor?
II.Should additional equity be sold?
III.Should a particular division be sold?
IV.Should a new product be introduced?

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

Question 10

Gujarat Corporation doubled its shareholders' equity during the year 2014.Gujarat did not issue any new equity,repurchase any equity,or pay out any dividends during the year.What is Gujarat's sustainable growth rate for 2014?

A) 50%
B) 100%
C) 150%
D) 200%
If equity doubled,then g* = change in equity/equity_bop = 100%.For example,if equity_bop was 25,the change in equity must also be 25 in order to double equity.

Question 11

In recent years,U.S.companies as a whole have repurchased more equity than they have issued.

Question 12

One way to manage an actual growth rate above a sustainable growth rate is to decrease prices.

Question 13

Which of the following statements is true?

A) Rapid growth spurs increases in market share and profits and thus,is always a blessing.
B) Firms that grow rapidly only very rarely encounter financial problems.
C) The cash flows generated in a given time period are equal to the profits reported.
D) Profits provide assurance that cash flow will be sufficient to maintain solvency.
E) Due to required cash investments in current assets,fast-growing and profitable companies can literally "grow broke".

Question 14

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?

A) net working capital policy
B) capital structure policy
C) dividend policy
D) capital budgeting policy
E) capacity utilization policy

Question 15

Which one of the following will increase the sustainable rate of growth a corporation can achieve?

A) avoidance of external equity financing
B) increase in corporate tax rates
C) reduction in the retention ratio
D) decrease in the dividend payout ratio
E) decrease in sales given a positive profit margin

Question 16

If a company seeks to maximize firm value,it should never grow at a rate above its sustainable growth rate.

Question 17

Milano Corporation has experienced growth of 20% for each of the last 5 years.Over this 5-year period,Milano's return on equity has never exceeded 15%,its profit margin has held steady at 5%,and its total asset turnover has not changed.Over the 5-year period,Milano paid no dividends and issued no new equity.Based on this information,which of the following can you most likely infer about Milano's performance over the past 5 years?

A) Milano's leverage has decreased.
B) Milano's leverage has remained constant.
C) Milano's leverage has increased.
D) None of the above.
Note first that g > g* because g = 20% and g*<15%.
With g > g* one of PRAT must increase.P has held steady at 5%,R has remained at 100%,A has not changed.Thus T (leverage)must have increased.

Question 18

Which one of the following correctly defines the retention ratio?

A) one plus the dividend payout ratio
B) additions to retained earnings divided by net income
C) additions to retained earnings divided by dividends paid
D) net income minus additions to retained earnings
E) net income minus cash dividends

Question 19

Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year.At the beginning of this year,its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities.It paid out $2 million in dividends for the year.What is Hayesville Corporation's sustainable growth rate?

A) 3%
B) 4%
C) 5%
D) 6%
ROE_bop × Retention ratio = (5/50)× 0.6 = 6%

Question 20

Which of the following would increase a company's need for external finance,all else equal?

A) An increase in the dividend payout ratio
B) A decrease in sales growth
C) An increase in profit margin
D) A decrease in the collection period

Question 21

The sustainable growth rate:

A) is the highest growth rate attainable for a firm that pays no dividends.
B) is the highest growth rate attainable for a firm without issuing new stock.
C) can never be greater than the return on equity.
D) can be increased by decreasing leverage.

Question 22

Westcomb,Inc.had equity of $150,000 at the beginning of the year.At the end of the year,the company had total assets of $195,000.During the year,the company sold no new equity.Net income for the year was $72,000 and dividends were $44,640.What is Westcomb's sustainable growth rate?

A) 15.32 percent
B) 15.79 percent
C) 17.78 percent
D) 18.01 percent
E) 18.24 percent

Question 23

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Boss Stores, Ine.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Selected financial information ($ millions)
$\begin{array}{l}\begin{array}{rrrr}&2011 & 2012 & 2013 & 2014 \\\hline \text {Sales}&\$ 287.31 & \$ 339.19 & \$ 411.78 & \$ 446.84 \\ \text {Net income}&11.22 & 16.48 & 19.70 & 12.23 \\ \text {Total assets}&268.58 & 275.30 & 318.43 & 451.32 \\ \text {Equity}&180.63 & 191.90 & 211.03 & 222.57 \\ \text {Dividends}&0.00 & 5.21 & 0.58 & 0.69 \\\hline\end{array}\end{array}$


-Please refer to the selected financial information for Boss Stores above.What is the actual sales growth rate for 2013?

A) - 17.6%
B) - 7.9%
C) 8.51%
D) 21.4%
E) None of the above.

Question 24

Why do financial managers need to understand the implications of the sustainable rate of growth?

Question 25

Please refer to the selected financial information for Law Specialists,Inc.above.Law Specialists paid its first dividends in 2014.As an analyst,assess the company's decision to pay dividends.

Question 26

Please refer to the selected financial information for Hard Knock Doors above.Calculate the actual and sustainable growth rates for Hard Knock Doors for each year,2010-2013.

Question 27

Please refer to the selected financial information for Hard Knock Doors above.Do you think Hard Knock Doors is having a problem financing its growth? If so,what is it doing to address the problem?

Question 28

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Boss Stores, Ine.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Selected financial information ($ millions)
$\begin{array}{l}\begin{array}{rrrr}&2011 & 2012 & 2013 & 2014 \\\hline \text {Sales}&\$ 287.31 & \$ 339.19 & \$ 411.78 & \$ 446.84 \\ \text {Net income}&11.22 & 16.48 & 19.70 & 12.23 \\ \text {Total assets}&268.58 & 275.30 & 318.43 & 451.32 \\ \text {Equity}&180.63 & 191.90 & 211.03 & 222.57 \\ \text {Dividends}&0.00 & 5.21 & 0.58 & 0.69 \\\hline\end{array}\end{array}$


-Please refer to the selected financial information for Boss Stores above.What is the sustainable growth rate for 2013?

A) - 17.6%
B) - 7.9%
C) 9.97%
D) 10.27%
E) 12.23%

Question 29

Which of the following actions would help a firm's growth problem if its actual sales growth exceeds its sustainable rate of growth?
I.Increase prices
II.Decrease financial leverage
III.Decrease dividends
IV.Prune away less-profitable products

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

Question 30

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Boss Stores, Ine.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Selected financial information ($ millions)
$\begin{array}{l}\begin{array}{rrrr}&2011 & 2012 & 2013 & 2014 \\\hline \text {Sales}&\$ 287.31 & \$ 339.19 & \$ 411.78 & \$ 446.84 \\ \text {Net income}&11.22 & 16.48 & 19.70 & 12.23 \\ \text {Total assets}&268.58 & 275.30 & 318.43 & 451.32 \\ \text {Equity}&180.63 & 191.90 & 211.03 & 222.57 \\ \text {Dividends}&0.00 & 5.21 & 0.58 & 0.69 \\\hline\end{array}\end{array}$


-Please refer to the selected financial information for Boss Stores above.What is the retention ratio for 2013?

A) 0.32
B) 0.68
C) 0.97
D) 1.00
E) None of the above.

Question 31

Use Law Specialists's selected financial information above to answer the following questions:
a.Calculate Law Specialists's sustainable growth rate in each year.b.Comparing the company's sustainable growth rate with its actual growth rate in sales,what growth problems did the company face over this period?

Question 32

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio.The asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period equity)is 1.77.What is Komatsu's sustainable rate of growth?

A) 1.91%
B) 6.12%
C) 10.83%
D) 11.26%
E) 12.74%

Question 33

A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent.Its asset turnover ratio is 0.85 and its assets-to-equity ratio (using beginning-of-period equity)is 1.80.What is its profit margin?

A) 3.79%
B) 5.69%
C) 6.75%
D) 10.13%
E) 18.24%

Question 34

Please refer to the selected financial information for Hard Knock Doors above.Is the increase in dividends between 2010 and 2013 a good idea for Hard Knock Doors?

Question 35

You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e. ,the company projected a financing surplus).Which of the following options,all else equal,would NOT correct the projected imbalance?

A) A stock repurchase
B) A decrease in accounts payable
C) An increase in cash and marketable securities
D) An increase in the retention ratio

Question 36

Wax Music expects sales of $437,500 next year.The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio.What is the projected increase in retained earnings?

A) $14,700
B) $17,500
C) $18,300
D) $20,600
E) $21,000

Question 37

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Boss Stores, Ine.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Selected financial information ($ millions)
$\begin{array}{l}\begin{array}{rrrr}&2011 & 2012 & 2013 & 2014 \\\hline \text {Sales}&\$ 287.31 & \$ 339.19 & \$ 411.78 & \$ 446.84 \\ \text {Net income}&11.22 & 16.48 & 19.70 & 12.23 \\ \text {Total assets}&268.58 & 275.30 & 318.43 & 451.32 \\ \text {Equity}&180.63 & 191.90 & 211.03 & 222.57 \\ \text {Dividends}&0.00 & 5.21 & 0.58 & 0.69 \\\hline\end{array}\end{array}$


-Please refer to the selected financial information for Boss Stores above.What is the difference between Boss's sustainable growth rate and its actual growth rate for 2014?

A) - 11.40%
B) - 7.09%
C) - 3.04%
D) 5.47%
E) 13.98%