Question 1

Internal growth rate: Swan Supply Company has profit of $1,212,335 on assets of $12,522,788 and retains 70 per cent of its income every year. What is the company's internal growth rate?

Accepted Answer

Internal growth rate can be calculated using the formula:

Internal Growth Rate = Retention Ratio x Return on Assets

Retention Ratio = Net Income / Total Income = 70% 
Return on Assets = Net Income / Total Assets = $1,212,335 / $12,522,788 = 0.0967

Internal Growth Rate = 0.7 x 0.0967 = 0.0677 = 6.8%

Therefore, the company's internal growth rate is 6.8%, which is option B.

Question 2

Internal growth rate: Mandolin Bottlers has profit of $4,272,335 and retains 65 per cent of its income every year. If the company's internal growth rate is 8.6 per cent, what is the company's total assets?

Accepted Answer

The correct answer is A.The internal growth rate is calculated as the percentage of retained earnings divided by the total assets. In this case, the internal growth rate is 8.6%, and the retained earnings are 65% of the profit, which is $4,272,335 * 0.65 = $2,784,518. Therefore, the total assets are $2,784,518 / 0.086 = $32,290,904.

Question 3

Which one of the following statements is NOT true?

Accepted Answer

The statement in option C is not entirely true. While the size of total assets may have some impact on a company's ability to grow without external funding, other factors such as profitability, efficiency, and debt levels also play a crucial role. Therefore, it is not accurate to say that a higher amount of total assets always translates into higher growth without external funding.

Question 4

External financing needed: Sterling Resorts has total assets worth $13,442,975. It is expecting to grow its revenue at a rate of 25 per cent next year. For next year they expect a profit of $3,475,321 and will pay out 45 per cent as dividends. What is the external financing needed by this company to meet its growth expectations?

Accepted Answer

The answer of External financing needed: Sterling Resorts has total...

Question 5

Addition to retained earnings: Hilton Company has revenues of $1,214,800 and costs of $816,355, and pays a tax rate of 32 per cent. If the company pays out 50 per cent of its earnings as dividends every year, what is the amount of retained earnings?

Accepted Answer

The correct answer is A because the amount of retained earnings is calculated as follows:Retained earnings = Net income - DividendsNet income = Revenues - Costs - TaxesNet income = $1,214,800 - $816,355 - ($1,214,800 - $816,355) * 0.32Net income = $1,214,800 - $816,355 - $126,592Net income = $272,853Dividends = Net income * 0.50Dividends = $272,853 * 0.50Dividends = $136,426.50Retained earnings = $272,853 - $136,426.50Retained earnings = $136,426.50

Question 6

Sustainable growth rate: If Merton Company has a ROE of 23.4 per cent, what is the plowback ratio needed to achieve a sustainable growth rate of 7 per cent?

Accepted Answer

The answer of Sustainable growth rate: If Merton Company has...

Question 7

Some weaknesses in financial planning models include:

Accepted Answer

All of the choices listed are weaknesses in financial planning models. Interest expense is a significant item in financial planning, but it is often not taken into account in many financial planning models. Working capital accounts, such as cash and inventory, do not always vary directly with sales, which can cause problems in financial planning. Fixed assets, such as property, plant, and equipment, also need to be adjusted for changes in sales, but this is often not done accurately in financial planning models.

Question 8

External funding needed is

Accepted Answer

External funding needed refers to the additional debt or equity a company needs to issue in order to purchase additional assets to support an increase in sales. This can include purchasing new equipment or expanding operations. Option B and C refer to funding needed to pay off existing debt, which is not the same as external funding needed. Option D is incorrect as option A is true.

Question 9

Sustainable growth rate: If Newell Company has a ROE of 18.6 per cent and a dividend payout ratio of 60 per cent, what is its sustainable growth rate?

Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROE * (1 - Dividend Payout Ratio). For Newell Company, SGR = 18.6% * (1 - 0.60) = 18.6% * 0.40 = 7.44%, which rounds to 7.4%.

Question 10

External financing needed: Triumph Company has total assets worth $6,413,228. Next year it expects a profit of $3,145,778 and will pay out 70 per cent as dividends. If the company wants to limit its external financing to $1 million, what is the growth rate it can support?

Accepted Answer

The answer of External financing needed: Triumph Company has total...

Question 11

External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have profit of $2,771,342 and pay out 60 per cent as dividends. If the company wants no external financing, what is the growth rate it can support?

Accepted Answer

The answer of External financing needed: Jockey Company has total...

Question 12

Companies that achieve higher growth rates without seeking external financing

Accepted Answer

Companies that achieve higher growth rates without seeking external financing generally have a high plowback ratio, meaning they reinvest a large portion of their profit back into the business. This leads to higher profitability, resulting in a high return on equity (ROE). Additionally, these companies are not highly leveraged, which means they have less debt and therefore more flexibility in their financial operations. All of these factors contribute to a company's ability to grow without needing external financing.

Question 13

External financing needed: Nederland Finance Company has total assets worth $9,751,223. It is expecting to grow its revenue at a rate of 20 per cent next year and will have a profit of $2,213,564 next year. The company pays out 65 per cent of its profit as dividends. What is the external financing needed by this company to meet its growth expectations?

Accepted Answer

To calculate the external funding needed, we need to use the Sustainable Growth Rate (SGR) formula:

SGR = (Net income / Total assets) × (1 - Dividend payout ratio)

SGR = ($2,213,564 / $9,751,223) × (1 - 0.65) = 0.0773 or 7.73%

Next, we need to calculate the expected increase in total assets based on the expected revenue growth:

Expected increase in total assets = Total assets × Revenue growth rate
Expected increase in total assets = $9,751,223 × 0.20 = $1,950,245.60

Finally, we can calculate the external financing needed:

External financing needed = (Expected increase in total assets × SGR) - Retained earnings

External financing needed = ($1,950,245.60 × 0.0773) - ($2,213,564 × 0.35) = $1,175,497.20

Therefore, the answer is A) $1,175,497.20.

Question 14

Companies that achieve higher growth rates without seeking external financing

Accepted Answer

Companies with less equity and/or the ability to generate high profits tend to have a higher return on equity (ROE), which can lead to higher growth rates without the need for external financing. A low plowback ratio (A) means that the company is retaining less earnings to reinvest in growth, while being highly leveraged (C) can increase financial risk and make it more difficult to secure financing for growth.

Question 15

Internal growth rate: Meredith Ltd has a return on equity of 21.5 per cent, an equity ratio of 55 per cent, and a dividend payout ratio of 70 per cent. What is the company's internal growth rate?

Accepted Answer

The internal growth rate is calculated using the formula: ROE * (1 - Dividend Payout Ratio) * Equity Ratio. Substituting the given values: 21.5% * (1 - 0.70) * 0.55 = 3.6%.

Question 16

Addition to retained earnings: Tangent, Ltd., has revenues of $4,375,233 and costs of $2,467,321, and pays a tax rate of 34 per cent. If the company pays out 60 per cent of its earnings as dividends every year, what is the amount of retained earnings?

Accepted Answer

First, we need to calculate the net income of Tangent, Ltd.:
Revenues - Costs = $4,375,233 - $2,467,321 = $1,907,912
Tax rate = 34%, so the tax expense is:
$1,907,912 x 34% = $648,144.48
Net income = $1,907,912 - $648,144.48 = $1,259,767.52
The company pays out 60% of its earnings as dividends, so the amount of dividends paid is:
$1,259,767.52 x 60% = $755,860.51
Retained earnings = Net income - Dividends paid
Retained earnings = $1,259,767.52 - $755,860.51 = $503,907.01, which is closest to option C.

Question 17

Which one of the following statements about the sustainable growth rate (SGR) is NOT true?

Accepted Answer

The higher a company's ROE and plowback ratio, the higher its SGR.

Question 18

In accounting for changes in fixed assets, which one of the following statements is NOT true?

Accepted Answer

The answer of In accounting for changes in fixed assets,...

Question 19

Internal growth rate: Mercantile Company has profit of $3,413,500 on assets of $16,109,445 and retains 55 per cent of its income every year. What is the company's internal growth rate?

Accepted Answer

The internal growth rate formula is:

Internal growth rate = Retention rate x Return on assets

Where:
Retention rate = 55%
Return on assets = (Profit ÷ Assets) = ($3,413,500 ÷ $16,109,445) = 21.17%

Therefore, 
Internal growth rate = 55% x 21.17% = 11.7%

Therefore, the answer is  C.

Question 20

The sustainable growth rate (SGR)

Accepted Answer

All of the options listed are true statements about the sustainable growth rate. A higher plowback ratio and a higher ROE both contribute to a higher SGR, and the SGR helps management avoid issuing new equity by determining the maximum rate of growth that can be sustained internally without equity financing.

Quiz 19: Strategic Financial Planning and Forecasting

Internal growth rate: Swan Supply Company has profit of $1,212,335 on assets of $12,522,788 and retains 70 per cent of its income every year. What is the company's internal growth rate?

Internal growth rate: Mandolin Bottlers has profit of $4,272,335 and retains 65 per cent of its income every year. If the company's internal growth rate is 8.6 per cent, what is the company's total assets?

Which one of the following statements is NOT true?

Addition to retained earnings: Hilton Company has revenues of $1,214,800 and costs of $816,355, and pays a tax rate of 32 per cent. If the company pays out 50 per cent of its earnings as dividends every year, what is the amount of retained earnings?

Sustainable growth rate: If Merton Company has a ROE of 23.4 per cent, what is the plowback ratio needed to achieve a sustainable growth rate of 7 per cent?

Some weaknesses in financial planning models include:

External funding needed is

Sustainable growth rate: If Newell Company has a ROE of 18.6 per cent and a dividend payout ratio of 60 per cent, what is its sustainable growth rate?

External financing needed: Triumph Company has total assets worth $6,413,228. Next year it expects a profit of $3,145,778 and will pay out 70 per cent as dividends. If the company wants to limit its external financing to $1 million, what is the growth rate it can support?

External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have profit of $2,771,342 and pay out 60 per cent as dividends. If the company wants no external financing, what is the growth rate it can support?

Companies that achieve higher growth rates without seeking external financing

Companies that achieve higher growth rates without seeking external financing

Internal growth rate: Meredith Ltd has a return on equity of 21.5 per cent, an equity ratio of 55 per cent, and a dividend payout ratio of 70 per cent. What is the company's internal growth rate?

Addition to retained earnings: Tangent, Ltd., has revenues of $4,375,233 and costs of $2,467,321, and pays a tax rate of 34 per cent. If the company pays out 60 per cent of its earnings as dividends every year, what is the amount of retained earnings?

Which one of the following statements about the sustainable growth rate (SGR) is NOT true?

In accounting for changes in fixed assets, which one of the following statements is NOT true?

Internal growth rate: Mercantile Company has profit of $3,413,500 on assets of $16,109,445 and retains 55 per cent of its income every year. What is the company's internal growth rate?

The sustainable growth rate (SGR)