Question 1

The Corner Store has $219,000 of sales and $193,000 of total assets.The firm is operating at 87 percent of capacity.What is the capital intensity ratio at full capacity?

Accepted Answer

Full-capacity sales = $219,000/0.87 = $251,724.14Capital intensity ratio = $193,000/$251,724.14 = 0.77

Question 2

Cross Town Express has sales of $137,000,net income of $14,000,total assets of $98,000,and total equity of $45,000.The firm paid $7,560 in dividends and maintains a constant dividend payout ratio.Currently,the firm is operating at full capacity.All costs and assets vary directly with sales.The firm does not want to obtain any additional external equity.At the sustainable rate of growth,how much new total debt must the firm acquire?

Accepted Answer

Dividend payout ratio = $7,560/$14,000 = 0.54Retention ratio = 1 - 0.54 = 0.46Sustainable growth = [($14,000/$45,000) × 0.46]/{1 - [($14,000/$45,000) × 0.46]} = 0.167012Projected total assets = $98,000 × 1.167012 = $114,367.22Current debt = $98,000 - $45,000 = $53,000Projected equity = $45,000 + ($14,000 × 1.167012 × 0.46) = $52,515.56New debt required = $114,367.22 - $53,000 - $52,515.56 = $8,852

Question 3

Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing.The firm maintains a constant debt-equity ratio of .0.55,a total asset turnover ratio of 1.30,and a profit margin of 9.0 percent.What must the dividend payout ratio be?

Accepted Answer

Return on equity = 0.09 × 1.30 × (1 + 0.55) = 0.18135Sustainable growth = [0.18135 × b]/[1 - (0.18135 × b)] = .05; b = 0.2626Payout ratio = 1 - 0.2626 = 73.74 percent

Question 4

The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio.What is the internal growth rate?

Accepted Answer

Internal growth rate = (0.09 × 0.75)/[1 - (0.09 × 0.75)] = 7.24 percent

Question 5

Designer's Outlet has a capital intensity ratio of 0.92 at full capacity.Currently,total assets are $48,900 and current sales are $51,200.At what level of capacity is the firm currently operating?

Accepted Answer

Total capacity sales = $48,900/0.92 = $53,152.17Current capacity utilization = $51,200/$53,152.17 = 96.3 percent

Question 6

A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent.The capital intensity ratio is 1.2 and the debt-equity ratio is 0.64.What is the profit margin?

Accepted Answer

0.062 = [ROE × 0.45]/[1 - (ROE × 0.45)]; ROE = .1297340.129734 = PM × (1/1.2) × (1 + .64); PM = 9.49 percent

Question 7

Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current sales of $611,000.How much can the firm grow before any new fixed assets are needed?

Accepted Answer

Full-capacity sales = $611,000/0.94 = $650,000Maximum growth without additional assets = ($650,000/$611,000) - 1 = 6.38 percent

Question 8

Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent.The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales.What is the pro forma net income?

Accepted Answer

Net income = $6,000 × .065 × (1 + .04) = $405.60

Question 9

Stop and Go has a 4.5 percent profit margin and an 18 percent dividend payout ratio.The total asset turnover is 1.6 and the debt-equity ratio is 0.45.What is the sustainable rate of growth?

Accepted Answer

Return on equity = 0.045 × 1.60 × (1 + 0.45) = 0.1044Sustainable growth = [0.1044 × (1 - 0.18)]/{1 - [.1044 × (1 - 0.18)]} = 9.36 percent

Question 10

The financial planning process tends to place the least emphasis on which one of the following?

Accepted Answer

The financial planning process typically focuses more on operational and strategic aspects like growth limitations, capacity utilization, capital structure, and dividend policy, rather than the market value of a firm, which is more of an outcome of these processes.

Question 11

Gladsden Refinishers currently has $21,900 in sales and is operating at 45 percent of the firm's capacity.What is the full capacity level of sales?

Accepted Answer

Full-capacity sales = $21,900/0.45 = $48,667

Question 12

The Dog House has net income of $3,450 and total equity of $8,600.The debt-equity ratio is 0.60 and the payout ratio is 30 percent.What is the internal growth rate?

Accepted Answer

Total assets = $8,600 × (1 + 0.60) = $13,760Return on assets = $3,450/$13,760 = .250727Internal growth = [.250727 × (1 - 0.30]/[1 - (.250727 × (1 - 0.30)] = 21.29 percent

Question 13

The Cookie Shoppe expects sales of $437,500 next year.The profit margin is 5.3 percent and the firm has a 30 percent dividend payout ratio.What is the projected increase in retained earnings?

Accepted Answer

Change in retained earnings = $437,500 × .053 × (1 - 0.30) = $16,231

Question 14

The financial planning process:
I.involves internal negotiations among divisions.
II.quantifies senior manager's goals.
III.considers only internal factors.
IV.reconciles company activities across divisions.

Accepted Answer

The financial planning process involves internal negotiations among divisions (I), helps in quantifying senior manager's goals (II), and reconciles company activities across divisions (IV). It does not solely consider internal factors as external factors such as market trends and economic conditions are also crucial in financial planning, making statement III incorrect.

Question 15

A Procrustes approach to financial planning is based on:

Accepted Answer

The Procrustes approach to financial planning involves tailoring or forcing financial plans to fit the preconceived goals or frameworks of senior managers, rather than adapting the plan based on changing circumstances or new information.

Question 16

The most recent financial statements for Last in Line,Inc.are shown here:  Assets and costs are proportional to sales.Debt and equity are not.A dividend of $992 was paid,and the company wishes to maintain a constant payout ratio.Next year's sales are projected to be $21,830.What is the amount of the external financing need?

Accepted Answer

Sales increase = ($21,830 - $18,500)/$18,500 = 0.18 External financing need = $105,622 - $91,265 = $14,357

Question 17

The most recent financial statements for Watchtower,Inc.are shown here (assuming no income taxes):  Assets and costs are proportional to sales.Debt and equity are not.No dividends are paid.Next year's sales are projected to be $4,750.What is the amount of the external financing needed?

Accepted Answer

Sales increase = ($4,750 - $3,800)/$3,800 = 0.25 New equity = $3,277 + $1,470 = $4,747External financing need = $11,387.50 - $4,747 - $5,833 = $807.5

Question 18

Wagner Industrial Motors,which is currently operating at full capacity,has sales of $29,000,current assets of $1,600,current liabilities of $1,200,net fixed assets of $27,500,and a 5 percent profit margin.The firm has no long-term debt and does not plan on acquiring any.The firm does not pay any dividends.Sales are expected to increase by 4.5 percent next year.If all assets,short-term liabilities,and costs vary directly with sales,how much additional equity financing is required for next year?

Accepted Answer

Projected assets = ($1,600 + $27,500) × 1.045 = $30,409.50Projected liabilities = $1,200 × 1.045 = $1,254Current equity = $1,600 + $27,500 - $1,200 = $27,900Projected increase in retained earnings = $29,000 × .05 × 1.045 = $1,515.25Equity funding need = $30,409.50 - $1,254 - $27,900 - $1,515.25 = -$259.75

Question 19

The most recent financial statements for 7 Seas,Inc.are shown here:  Assets,costs,and current liabilities are proportional to sales.Long-term debt and equity are not.The company maintains a constant 50 percent dividend payout ratio.Like every other firm in its industry,next year's sales are projected to increase by exactly 16 percent.What is the external financing need?

Accepted Answer

External financing needed = $13,069.72 - $11,752.56 = $1,317.16

Question 20

Miller Bros.Hardware is operating at full capacity with a sales level of $689,700 and fixed assets of $468,000.The profit margin is 7 percent.What is the required addition to fixed assets if sales are to increase by 10 percent?

Accepted Answer

Required addition to fixed assets = $468,000 × 0.10 = $46,800Or, Capital intensity ratio = $468,000/$689,700 = 0.678556Required addition to fixed assets = $689,700 × 0.10 × 0.678556 = $46,800

Quiz 4: Long-Term Financial Planning and Growth