Deck 4: Long-Term Financial Planning and Growth

Question 1

Financial planning is important because the only way for a firm to prosper is for it to grow.

Answer 1

False

Question 2

Asset requirements is a common element among financial planning models.

Answer 2

True

Question 3

The firm's investment and financing decisions are unrelated and should not be analyzed at the
same time.

Answer 3

False

Question 4

By developing a financial plan a firm benefits by being forced to think about and forecast the future.

Question 5

A pro forma balance sheet should include consideration of the capacity level of the firm.

Question 6

Financial planning helps investigate the linkages between goals and the different aspects of a firm's
business.

Question 7

Very few financial planning models require an externally supplied sales forecast.

Question 8

Sales forecasts are a common element among financial planning models.

Question 9

Pro forma statements should consider the dividend policy of the firm.

Question 10

A pro forma balance sheet must always maintain the current debt-equity ratio of a firm.

Question 11

If total assets increase by the same percentage as sales increase it is likely assets and sales will
increase by identical dollar amounts.

Question 12

All else equal, the lower the forecast growth the larger the level of external financing needed.

Question 13

A pro forma income statement should consider both macroeconomic and industry forecasts.

Question 14

By developing a financial plan a firm benefits by being forced to focus on best case scenarios.

Question 15

Aggregation refers to the process by which a firm first projects its aggregate investment
requirement, then it breaks that total up and allocates it to the investment proposals of the firm's
smaller units.

Question 16

By developing a financial plan a firm benefits by being forced to set goals and establish priorities.

Question 17

Conventional wisdom holds that financial plans don't work, but financial planning does.

Question 18

With good financial planning, managers can be less vigilant in their day to day management of the
firm.

Question 19

In most industries, planning beyond the period of one year is not very useful.

Question 20

Pro forma statements are a common element among financial planning models.

Question 21

When utilizing the percentage of sales approach, managers can ignore any projected dividends.

Question 22

The dividend policy decision is a basic policy element of financial planning.

Question 23

When utilizing the percentage of sales approach, managers need to determine the level of sales
required based on the desired profit margin percentage.

Question 24

If total assets increase by the same percentage as sales increase: the firm is assumed to be
operating at full capacity.

Question 25

If the Ballard Institute currently operates at full capacity, then fixed assets would most likely vary
directly with sales.

Question 26

The retention ratio is equal to one plus the dividend payout ratio.

Question 27

If total assets increase by the same percentage as sales increase the larger the increase in sales,
the more likely there will be a need for external financing.

Question 28

An increase in a firm's capital intensity ratio implies a decrease in how efficiently it uses its assets to
generate sales.

Question 29

All else the same, lower return on assets (ROA) ratio would likely be associated with a firm which
has a high capital intensity ratio, relative to other firms in the same industry.

Question 30

The retention ratio is also known as the plowback ratio.

Question 31

If the Limberger Institute currently operates at full capacity, then accounts receivable would most
likely vary directly with sales.

Question 32

Generally speaking, actions that increase the firm's ability to generate funds internally decrease its
ability to grow without obtaining external financing.

Question 33

All else equal, an increase in a firm's capital intensity ratio will increase its external financing
needed.

Question 34

All else the same, lower fixed asset turnover ratio would likely be associated with a firm which has a
high capital intensity ratio, relative to other firms in the same industry.

Question 35

One would expect the capital intensity ratio of an auto manufacturing firm to be lower than that of a
software development firm.

Question 36

When utilizing the percentage of sales approach, managers need to identify which expenses are
variable and which are fixed.

Question 37

If the Ballard Institute currently operates at full capacity, then long-term debt would most likely vary
directly with sales.

Question 38

All else equal, a firm that utilizes assets inefficiently will have a higher sustainable growth rate than
a firm that does not.

Question 39

When utilizing the percentage of sales approach, managers need to determine the capital intensity
ratio.

Question 40

All else the same, greater depreciation expense would likely be associated with a firm which has a
high capital intensity ratio, relative to other firms in the same industry.

Question 41

The following balance sheet and income statement should be used: Hilltop, Inc. is currently operating at 75% of capacity. What is the required increase in fixed assets if sales are projected to increase by 30 percent?

A) $0
B) $680
C) $1,470
D) $1,840
E) $2,160

Question 42

The sustainable growth rate includes a constant debt-equity ratio.

Question 43

The sustainable growth rate excludes any kind of external financing.

Question 44

The sustainable growth rate is dependent on profit margin.

Question 45

Assets, accounts payable and costs are proportional to sales. Debt and equity are not. Sales of Wintergreen, Inc. are expected to increase by 12% next year. Wintergreen is currently
Operating at 85% of capacity. The plowback ratio is 60%. What is the external financing need?

A) -$809
B) -$433
C) $1,290
D) $1,563
E) $2,043

Question 46

The following balance sheet and income statement should be used: Taylor, Inc. is projecting sales to increase by 7% next year with the profit margin remaining constant. The firm is increasing the dividend payout ratio to 50 percent. What is the amount of the projected
Addition to retained earnings for next year?

A) $822.16
B) $989.13
C) $1,106.67
D) $1,278.65
E) $1,534.38

Question 47

All else the same, an increase in a firm's dividend payout ratio will decrease its external financing
needed.

Question 48

The following balance sheet and income statement should be used: What is the projected addition to retained earnings if Taylor, Inc. grows at the internal rate of growth and both the profit margin and the dividend payout ratio remain constant?

A) $1,326.45
B) $1,387.22
C) $1,434.00
D) $1,490.63
E) $1,541.52

Question 49

Total asset turnover is a determinant of growth.

Question 50

Jack's currently has $798,200 in sales and is operating at 73% of the firm's capacity. What is the full capacity level of sales?

A) $582,686
B) $804,927
C) $1,013,714
D) $1,093,425
E) $1,380,886

Question 51

Calculate depreciation expense given the following information. Interest expense $2,000; times interest earned 5; cash coverage ratio 5.5.

A) $1,000
B) $1,200
C) $1,400
D) $1,600
E) $1,800

Question 52

All else the same, an increase in a firm's dividend payout ratio will decrease its sustainable growth
rate.

Question 53

The sustainable growth rate excludes additional equity financing.

Question 54

Profit margin is a determinant of growth.

Question 55

The equity multiplier is a determinant of growth.

Question 56

The sustainable growth rate includes a variable debt-equity ratio.

Question 57

There are no direct connections between the growth that a company can achieve and the financial
policies undertaken by the financial managers.

Question 58

All else the same, an increase in a firm's dividend payout ratio will decrease its internal growth rate.

Question 59

The following balance sheet and income statement should be used: Hilltop, Inc. is currently operating at 82% of capacity. The profit margin and the dividend payout ratio are constant. Net working capital and fixed assets vary directly with sales. Sales are projected
To increase by 20 percent. What is the external financing need?

A) -$736
B) -$487
C) $1,144
D) $5,708
E) $6,768

Question 60

Assets, accounts payable and costs are proportional to sales. Debt and equity are not. Sales of Wintergreen, Inc. are expected to increase by 13% next year. The dividend payout ratio is
35%) The company is currently operating at 93% of capacity. What is the projected retained
Earnings balance at the end of next year?

A) $132
B) $414
C) $1,235
D) $2,087
E) $2,203

Question 61

Assets, accounts payable and costs are proportional to sales. Debt and equity are not. Sales of Wintergreen, Inc. are expected to increase by 6% next year. Wintergreen is currently
Operating at maximum capacity. Wintergreen has a 20% dividend payout ratio. What is the external
financing need?

A) -$196
B) -$161
C) $161
D) $196
E) $279

Question 62

Calculate sales given the following data. Total fixed assets $400,000; long-term liabilities $155,000; total liabilities $280,000; total shareholders' equity $320,000; net working capital turnover 20.

A) $1,500,000
B) $1,700,000
C) $1,900,000
D) $2,100,000
E) $2,250,000

Question 63

Given the following information, calculate sales value. Total asset turnover 0.80; total liabilities $5,000; total equity $5,000.

A) $8,600
B) $8,000
C) $10,600
D) $11,600
E) $12,600

Question 64

Silver's Jewelers has current sales of $138,900 and a profit margin of 8 percent. The firm estimates that sales will increase by 4% next year and that all costs will vary in direct proportion to sales. What
Is the pro forma net income?

A) $6,000.48
B) $6,240.50
C) $11,112.00
D) $11,556.48
E) $12,629.32

Question 65

Assume costs and assets increase at the same rate as sales. Also assume 40% of net income is paid out in dividends, the current debt to equity ratio is optimal, and that no new equity sales are
Possible. Forecast the addition to retained earnings assuming the firm's sales increase at the
Maximum percent possible given these assumptions.

A) $43.2
B) $88.5
C) $113.3
D) $146.7
E) $167.8

Question 66

Master Wood Carvers, Inc. currently has $134,000 of sales and net income of $15,600. The firm is expecting sales growth of 6% next year. Costs are a constant percentage of sales. What is the
Projected net income for next year?

A) $15,600
B) $16,536
C) $16,708
D) $18,860
E) $23,100

Question 67

The following balance sheet and income statement should be used: The profit margin, the debt-equity ratio, and the dividend payout ratio are constant. Sales are expected to increase by $4,624 next year. What is the projected addition to retained earnings for
Next year?

A) $229.44
B) $1,108.96
C) $1,663.44
D) $2,241.41
E) $2,772.40

Question 68

Calculate the projected fixed assets needed given the following information: current sales = $275,000; current sales capacity = 75%; current fixed assets = $40,000; projected future sales =
$475,000.

A) $11,818
B) $51,818
C) $12,818
D) $52,818
E) $60,818

Question 69

Pickup Industries has a profit margin of 15% and a dividend payout of 40%. Last year's sales were $600 million and total assets were $400 million. None of the liabilities vary directly with sales, but
Assets and costs do. If the sales growth rate for Pickup is 20%, how much external financing is
Needed?

A) $5.2 million
B) $13.1 million
C) $15.2 million
D) $21.3 million
E) $26.0 million

Question 70

Baker's Dozen has current sales of $1,400 and a profit margin of 7 percent. The firm estimates that sales will increase by 8% next year and that all costs will vary in direct relationship to sales. What is
The pro forma net income?

A) $90.72
B) $98.00
C) $105.84
D) $107.84
E) $119.84

Question 71

Knudsen, Inc.'s firm's full-capacity sales level is $3,000,000. If the firm is currently operating at 80% of capacity, what is the current level of sales?

A) $600,000
B) $1,500,000
C) $1,750,000
D) $2,400,000
E) $3,750,000

Question 72

The following balance sheet and income statement should be used: Hilltop, Inc. is currently operating at 89% of capacity. The profit margin and the dividend payout ratio are projected to remain constant. Sales are projected to increase by 10% next year. What is the
Projected addition to retained earnings for next year?

A) $1,527
B) $1,692
C) $1,716
D) $1,804
E) $1,856

Question 73

Given the following information: current assets = $400; fixed assets = $500; accounts payable = $100; notes payable = $45; long-term debt = $455; equity = $300; sales = $450; costs = $400; tax
Rate = 34%. Suppose that current assets, costs, and accounts payable maintain a constant ratio to
Sales. If the firm is producing at 80% capacity, what is the total external financing needed if sales
Increase 25%? Assume the firm pays no dividends.

A) $33.75
B) $66.25
C) $143.75
D) $172.50
E) $380.25

Question 74

Assuming that a company has a policy of paying out a constant fraction of net income in the form of a cash dividends, calculate the addition to retained earnings given the following information: cash
Dividends = $3,000; net income = $15,000.

A) $10,000
B) $12,000
C) $14,000
D) $16,000
E) $18,000

Question 75

Assume that Delalo, Inc. is operating at 80 percent of capacity. All costs and net working capital vary directly with sales. What is the amount of the pro forma net fixed assets if sales are projected
To increase by 25%?

A) $9,616
B) $10,020
C) $12,040

Question 76

ABC, Inc. is operating at full capacity with a sales level of $1,400 and fixed assets of $700. What is the required addition to fixed assets if sales are to increase by 10%?

A) $35
B) $70
C) $140
D) $280
E) $300

Question 77

The following balance sheet and income statement should be used: Assume that Taylor, Inc. is operating at 85% of capacity. All costs and net working capital vary directly with sales. What is the amount of total fixed assets required if sales are projected to
Increase by 20 percent?

A) $12,840.00
B) $13,096.80
C) $13,108.68
D) $13,397.24
E) $13,414.14

Question 78

Assume Marble is projecting a 20% increase in sales for the coming year, and that assets, all costs, and current liabilities are proportional to sales. Long-term debt is not proportional to sales. Assume
The firm's tax rate remains unchanged and the dividend payout is 40%. What is the external
financing needed (EFN) for 2015 ($ in millions)?

A) $64.1
B) $110.9
C) $132.3

Question 79

Calculate the external financing needed given the following information: current sales = $275,000; current sales capacity = 75%; current fixed assets = $40,000; projected future sales = $475,000.

A) $11,818
B) $51,818
C) $12,818
D) $52,818
E) $60,818

Question 80

The Smith Co., which is currently operating at full capacity, has sales of $3,000, current assets of $800, current liabilities of $400, net fixed assets of $1,900, and a 6% 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 9% next year. If all assets, liabilities, and costs vary directly with sales, how
Much additional equity financing is required for next year?

A) $10.80
B) $40.00
C) $103.50
D) $196.20
E) $207.00