Question 1

Which one of these best describes the relationship between net working capital (NWC)and sales?

Accepted Answer

Net working capital (NWC) changes in direct relation to sales, but the change may be less than proportional with sales. As sales increase, a company may need to invest more in inventory, accounts receivable, and prepayments, which would increase NWC. However, some of these investments may not increase proportionally with sales, leading to a less than proportional change in NWC. Similarly, if sales decrease, a company may be able to reduce its investment in these areas, leading to a decrease in NWC.

Question 2

All of the following are part of the financial planning process except:

Accepted Answer

All of the other options - deciding which risks are worth taking, analyzing investment and financing options, and projecting the future - are part of the financial planning process. Minimizing risk is a goal of financial planning, but not a step within the process itself.

Question 3

In the percentage of sales model,which one of these is most likely to increase in uneven increments as sales increase?

Accepted Answer

Fixed assets are likely to increase in uneven increments because they are typically purchased in large, infrequent amounts rather than steadily increasing with sales.

Question 4

Which one of the following would increase the sustainable growth rate?

Accepted Answer

The sustainable growth rate is calculated as (ROE x retention ratio), where the retention ratio is (1 - Payout ratio). Therefore, reducing the payout ratio would increase the retention ratio and thus increase the sustainable growth rate.

A) Reducing the ROE would decrease the sustainable growth rate.
B) Increasing the asset beta would increase the cost of equity and also decrease the sustainable growth rate.
D) Reducing the operating leverage wouldn't have a direct impact on the sustainable growth rate.

Question 5

The sustainable growth rate is the maximum growth rate that the firm can achieve

Accepted Answer

The sustainable growth rate is the maximum growth rate that the firm can achieve while maintaining its debt ratio. This means that the firm can achieve growth without the need for external financing or investing in additional fixed assets beyond its capacity, while also avoiding excessive strains on management. It represents a balance between growth and financial stability.

Question 6

What is the internal growth rate for a firm with an ROE of 20%,a dividend payout ratio of 40%,and an equity-to-debt ratio of 60%?

Accepted Answer

IG = (1 − 0.40) × 0.20 × [0.60 / (1 + 0.60)] = 0.0450, or 4.50%

Question 7

What is the sustainable growth rate for a firm with $250,000 in net income,$100,000 in common stock dividends,and equity of $1 million?

Accepted Answer

SG = [($250,000 − 100,000) / $250,000] × $250,000 / $1m = 0.15, or 15%

Question 8

Assume a firm wants to hold its current long-term debt-to-equity ratio constant at 0.55 and its payout ratio constant at 35%.The firm neither issues nor repurchases shares.If the firm generates $326,000 of net income,what is the maximum amount that the firm can increase its long-term debt?

Accepted Answer

Maximum debt increase = $326,000 × (1 − 0.35) × 0.55 = $116,545

Question 9

A firm has projected sales of $328,000,costs of goods sold equal to 68% of sales,interest of $18,500,a tax rate of 35%,and a dividend payout ratio of 60%.What will be the addition to retained earnings?

Accepted Answer

Add to RE = ({[$328,000(1 − 0.68)] − $18,500} × (1 − 0.35)) × (1 − 0.60) = $22,480

Question 10

A financial plan:

Accepted Answer

A financial plan provides a roadmap for achieving financial goals and objectives, and it is essential for evaluating the performance of the plan over time. While it is impossible to predict every possible contingency, a well-designed financial plan should identify and plan for major risks and uncertainties. A financial plan should also be flexible and adaptable to changing circumstances. Planning for the worst-case scenario may be appropriate in certain situations, but it is generally not necessary or advisable for most individuals or businesses.

Question 11

The sustainable growth rate:

Accepted Answer

The sustainable growth rate increases as the payout ratio decreases because more earnings are retained in the business, allowing for more reinvestment and growth.

Question 12

Which one of these is least likely to change proportionally with sales?

Accepted Answer

Depreciation is a non-cash expense that represents the gradual loss of value of a company's assets. It is determined by a variety of factors, such as initial cost, estimated useful life, and salvage value, which are not directly tied to sales volume. Therefore, depreciation is the least likely to change proportionally with sales.

Question 13

If a firm does not want to use either dividends or debt as the plug,then the obvious plug is:

Accepted Answer

If a firm does not want to use dividends or debt as the plug, then the best option would be to issue new equity. This would provide the company with additional funds without taking on debt or reducing cash reserves. However, issuing new equity may dilute the value of existing shares, so the decision should be carefully considered.

Question 14

If book equity increases by $2,000,the firm does not issue new equity,and its net income is $2,500,then:

Accepted Answer

The increase in book equity of $2,000, with a net income of $2,500 and no new equity issued, implies that the difference of $500 was paid out as dividends.

Question 15

Which one of the following is not an output of a financial plan?

Accepted Answer

Sales forecasts are typically an input to a financial plan, as they help to determine the projected revenue and cash inflows. Financial ratios, pro forma statements, and sources and uses of cash statement are all outputs of a financial plan that provide key information about the financial health and performance of a business.

Question 16

Which one of the following statements regarding financial planning models is false?

Accepted Answer

The answer of Which one of the following statements regarding...

Question 17

A firm's internal growth rate is all of the following except:

Accepted Answer

A firm's internal growth rate is the maximum growth rate that a company can achieve without requiring external sources of new capital. It is calculated using the plowback ratio (retained earnings divided by net income), return on equity (ROE), and the ratio of equity to assets. It is not the rate below which external financing is needed, as stated in option A.

Question 18

Sources and uses of funds are made equal through:

Accepted Answer

A balancing item, also known as a plug figure, is a financial statement line item used to make sources equal to uses of funds. It is typically used when preparing cash flow statements or financial statements for a business or project. The balancing item ensures that the total inflows of funds equal the total outflows of funds, providing an accurate representation of a company's financial health.

Question 19

A percentage of sales model projects sales to increase by 5% annually over the next 4 years.If costs are forecast at a constant 80% of sales,and this year's income is $1,250,the forecast income in the fourth year will be:

Accepted Answer

Net income_Year₄ = $1,250 × (1 + 0.05)⁴ = $1,519.38

Question 20

If a firm's sales increase by 12%,and it has no spare capacity,it must increase fixed assets by at least:

Accepted Answer

If the firm's sales increase by 12%, it implies a proportional increase in its revenue. If the firm has no spare capacity, it means that it has already utilized all its fixed assets. Therefore, to cope with the increased demand, the firm must increase its fixed assets by the same percentage as its increase in sales. Therefore, fixed assets must increase by 12%. Hence, the correct option is (D).

Quiz 18: Long-Term Financial Planning

Which one of these best describes the relationship between net working capital (NWC) and sales?