Question 1

Which one of the following correctly defines the retention ratio?

Accepted Answer

The retention ratio is defined as the addition to retained earnings divided by net income. This ratio indicates the percentage of net income that is retained in the company rather than being paid out as dividends.

Question 2

Which one of the following is correct in relation to pro forma statements?

Accepted Answer

Inventory changes are directly proportional to sales changes because as sales increase, a company typically needs to increase its inventory to meet the higher demand.

Question 3

Which one of the following terms is defined as dividends paid expressed as a percentage of net income?

Accepted Answer

Dividend payout ratio is the dividend paid out as a percentage of the net income. The dividend retention ratio is the opposite, indicating the portion of earnings that are retained by the company rather than distributed as dividends. Dividend yield is the annual dividend payment as a percentage of the stock price, while dividend portion and dividend section are not commonly used financial terms.

Question 4

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:

Accepted Answer

A pro forma statement showing an increase in both sales and fixed assets suggests that the firm is expanding its operations to support higher sales, indicating it was previously operating at full capacity.

Question 5

Financial planning:

Accepted Answer

Financial planning considers multiple options and scenarios for the next two to five years. It is not solely focused on the short-term outlook and is not a process that firms only undergo when major changes are anticipated. While it may not provide immediate benefits for highly responsive firms, it is still an important process for long-term success.

Question 6

Which one of the following statements is correct?

Accepted Answer

Pro forma statements are future projections based on assumptions and estimates. They are not guarantees and can be affected by various factors such as market conditions, economic changes, and unexpected events. Therefore, it is important to use pro forma statements as a tool to forecast potential financial outcomes rather than rely on them as definite results.

Question 7

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

Accepted Answer

Financial planning for a firm involves determining asset requirements, developing plans for unexpected events, establishing priorities, and analyzing funding options, thus encompassing all the listed activities.

Question 8

Phil is working on a financial plan for the next three years.This time period is referred to as which one of the following?

Accepted Answer

The term "planning horizon" refers to the length of time for which a financial plan is being developed, and in this case, Phil is working on a plan for the next three years. Therefore, the correct answer is B) planning horizon. The other options are either incorrect or do not accurately describe the time period for Phil's financial plan.

Question 9

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

Accepted Answer

The internal growth rate of a firm is the maximum growth rate a firm can achieve without resorting to external financing, which means it relies solely on its own operations and reinvested earnings to finance any growth.

Question 10

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?

Accepted Answer

Developing a financial plan for a corporation involves considering all aspects of the company's finances, including net working capital needs (I), the requirement for additional fixed assets (II), dividend payments to shareholders (III), and the necessity to obtain new debt (IV). These elements are crucial for ensuring the company's financial health and strategic growth.

Question 11

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?

Accepted Answer

The percentage of sales method is a financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values. This method involves calculating the percentage of sales that can be allocated to different expenses and assets in order to forecast financial outcomes.

Question 12

Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?

Accepted Answer

The capital intensity ratio measures the amount of assets a company needs to generate a dollar in revenue. It is calculated by dividing total assets by total revenue. Therefore, D is the correct choice.

Question 13

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:

Accepted Answer

The answer of A firm is currently operating at full...

Question 14

Which one of the following statements concerning financial planning for a firm is correct?

Accepted Answer

Financial plans often include different scenarios based on various economic developments to provide flexibility and allow for contingency planning. The other options are incorrect as financial planning for fixed assets is typically done at a firm level, financial plans generally aim to reconcile conflicting goals, external financing is often required, and economic assumptions may be varied to test different scenarios.

Question 15

When constructing a pro forma statement,net working capital generally:

Accepted Answer

Net working capital, which represents the difference between a firm's current assets and current liabilities, tends to vary proportionally with sales. As sales increase, the firm may have to increase its inventory, accounts receivable, and other current assets to support its operations, leading to an increase in net working capital. On the other hand, if sales decrease, the firm may have to reduce its current assets to free up cash, leading to a decrease in net working capital. Therefore, E is the best answer.

Question 16

Which of the following questions are appropriate to address during the financial planning process?
I.Should the firm merge with a competitor?
II.Should additional shares of stock be sold?
III.Should a particular division be sold?
IV.Should a new product be introduced?

Accepted Answer

All the options (I, II, III, and IV) are appropriate to address during the financial planning process as they all involve significant financial decisions that can impact a firm's capital structure, revenue streams, and market positioning.

Question 17

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

Accepted Answer

The sustainable growth rate of a firm is the maximum growth rate achievable without the need for external equity financing while maintaining a constant debt-equity ratio. This means that the firm is using retained earnings and debt to finance its growth, but is not issuing any new equity. Therefore, choice D, which specifies this definition, is the correct answer.

Question 18

When utilizing the percentage of sales approach,managers:
I.estimate company sales based on a desired level of net income and the current profit margin.
II.consider only those assets that vary directly with sales.
III.consider the current production capacity level.
IV.can project both net income and net cash flows.

Accepted Answer

The answer of When utilizing the percentage of sales approach,managers:
I.estimate...

Question 19

You are getting ready to prepare pro forma statements for your business.Which one of the following are you most apt to estimate first as you begin this process?

Accepted Answer

The sales forecast is typically the first item to be estimated when preparing pro forma statements. This is because all other items, such as expenses and net income, are directly influenced by expected sales. It is important to have a realistic and accurate sales forecast in order to create a reliable pro forma financial statement.

Question 20

Atlas Industries combines the smaller investment proposals from each operational unit into a single project for planning purposes.This process is referred to as which one of the following?

Accepted Answer

The process of combining smaller investment proposals into a single project for planning purposes is called aggregation. Conjoining refers to bringing two or more things together, conglomeration refers to the merging of multiple companies or businesses, appropriation refers to the allocation of funds, and summation refers to adding up multiple values or numbers. None of these terms accurately describe the process used by Atlas Industries.

Quiz 4: Long-Term Financial Planning and Growth