Question 1

Internally generated funds which are available for distribution to owners of for reinvestment back into the business to support future growth can be characterized by which of the following?

Accepted Answer

The answer of Internally generated funds which are available for...

Question 2

Use the following information to estimate a venture's sustainable growth rate: net income = $200,000; total assets = $1,000,000; equity multiplier based on beginning common equity = 2.0 times; and retention rate = 25%.

Accepted Answer

The sustainable growth rate can be calculated using the formula: Sustainable Growth Rate = ROE * Retention Rate. First, calculate the Return on Equity (ROE). ROE = Net Income / Equity. Given an equity multiplier of 2.0 times and total assets of $1,000,000, Equity = Total Assets / Equity Multiplier = $1,000,000 / 2 = $500,000. Thus, ROE = $200,000 / $500,000 = 0.4 or 40%. With a retention rate of 25%, the sustainable growth rate = 40% * 25% = 10%.

Question 3

A venture's common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate?

Accepted Answer

The answer of A venture's common equity account increased by...

Question 4

If a venture has a return on assets (ROA)of 10%, an equity multiplier based on beginning equity of 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be:

Accepted Answer

Sustainable Growth Rate (SGR) = ROA x Equity Multiplier x (1 - Dividend payout ratio)

SGR = 10% x 4.0 x (1 - 0.60) = 16%

Question 5

Which of the following ratios is not part of the standard return on equity (ROE)model?

Accepted Answer

The standard ROE model includes three ratios - net profit margin, asset turnover, and equity multiplier - which are multiplied together to get the ROE. The retention rate is not part of the standard ROE model.

Question 6

A firm projects net income to be $500,000, intends to pay out $125,000 in dividends, and had $2 million of equity at the beginning of the year. The firm's sustainable growth rate is:

Accepted Answer

Sustainable growth rate = (Net Income - Dividends) / Equity
Sustainable growth rate = ($500,000 - $125,000) / $2,000,000
Sustainable growth rate = 0.1875 or 18.75%

Question 7

If a venture has a return on assets (ROA)of 10%, an equity multiplier based on beginning equity of 3.5 times, and a retention rate of 50%, the sustainable growth rate would be:

Accepted Answer

The formula for calculating sustainable growth rate is:
Retained Earnings/Total Equity = Retention Rate x Return on Equity
Return on Equity = ROA x Equity Multiplier

Using the given values:
Return on Equity = 10% x 3.5 = 35%
Retention Rate = 50%

Retained Earnings/Total Equity = 0.5 x 35%
Retained Earnings/Total Equity = 17.5%

Therefore, the sustainable growth rate is 17.5%. Hence option B is correct.

Question 8

Determine a firm's financial policy multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2.0 times.

Accepted Answer

The answer of Determine a firm's financial policy multiplier based...

Question 9

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and dividend payout percentage = 20%.

Accepted Answer

The answer of Determine a venture's sustainable growth rate based...

Question 10

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and retention rate = 50%.

Accepted Answer

The sustainable growth rate (SGR) is calculated as the retention rate multiplied by the return on equity (ROE). ROE is net income divided by common equity at the beginning of the year. Here, ROE = $100,000 / $500,000 = 0.20 or 20%. SGR = 0.50 * 20% = 10%.

Question 11

The financial funds needed to acquire assets necessary to support a firm's sales growth is called:

Accepted Answer

The financial funds needed to acquire assets necessary to support a firm's sales growth is called financial capital needed. Option A, spontaneously generated funds, refers to the funds that are generated internally by the business without requiring any additional financing. Option B, additional funds needed, refers to the amount of funds required by the company beyond the internally generated funds to achieve the desired sales growth. Option C, addition in retained earnings, refers to the portion of net income that is not paid out as dividends, which is added to the company's retained earnings account. None of these options accurately describe the financial funds needed to acquire assets necessary to support a firm's sales growth.

Question 12

If a venture has a return on assets (ROA)of 12%, an equity multiplier based on beginning equity of 3.0 times, and a sustainable growth rate of 18%, the retention rate would be:

Accepted Answer

The retention rate can be calculated using the formula for the sustainable growth rate: Sustainable Growth Rate = ROE * Retention Rate. ROE can be found by multiplying ROA by the equity multiplier. In this case, ROE = 12% * 3 = 36%. Given the sustainable growth rate is 18%, we can rearrange the formula to find the retention rate = Sustainable Growth Rate / ROE = 18% / 36% = 0.5 or 50%.

Question 13

If beginning-of-period common equity is $200,000 and end-of-period common equity is $300,000, the sustainable growth rate is:

Accepted Answer

Sustainable growth rate = (ROE x Retention ratio)
ROE = (Net income / Beginning-of-period common equity) 
Retention ratio = (End-of-period common equity - Dividends) / End-of-period common equity

Plugging in the given values: 
ROE = (Net income / Beginning-of-period common equity) = (X / $200,000) 
Retention ratio = (End-of-period common equity - Dividends) / End-of-period common equity = ($300,000 - Y) / $300,000

Thus, Sustainable growth rate = (X / $200,000) x [($300,000 - Y) / $300,000]

The problem does not give values for net income or dividends, so we cannot determine a specific percentage for the sustainable growth rate. However, we can determine which answer choice is closest to being mathematically possible by using the maximum potential values for ROE and retention ratio based on the given information:

ROE would be highest if net income is equal to end-of-period common equity (since that would result in the highest return on the equity). Plugging in this value, we get: 
ROE = ($300,000 / $200,000) = 1.5 or 150%

Retention ratio would be highest if no dividends were paid during the period. Plugging in this value, we get: 
Retention ratio = ($300,000 / $300,000) = 1 or 100%

Thus, the highest possible sustainable growth rate based on the given information would be: 
Sustainable growth rate = (1.5 x 1) = 1.5 or 150%

Looking at the answer choices, we can see that C is the closest to 150%, so that is the best choice.

Question 14

A firm has net income of $320,000 and sales of $3,200,000. Its assets total $2,000,000, the equity at the beginning of the year was $1,600,000, and dividends paid were $80,000. What is the sustainable growth rate?

Accepted Answer

The answer of A firm has net income of $320,000...

Question 15

Determine a firm's return on assets percentage based on the following information: sustainable growth rate = 20%; total assets = $500,000; beginning-of-year common equity = $200,000; and dividend payout percentage = 60%.

Accepted Answer

The answer of Determine a firm's return on assets percentage...

Question 16

Which of the following is not part of the financial forecasting process used to project financial statements?

Accepted Answer

While projecting the cost of equity capital is a critical component of financial analysis, it is not part of the financial forecasting process used to project financial statements. The financial forecasting process typically involves projecting the income statement, balance sheet, and statement of cash flows based on assumptions and estimates of the company's future financial performance.

Question 17

A venture's common equity was $50,000 at the end of last year. If the venture's common equity at the end of this year was $60,000, what was its sustainable sales growth rate?

Accepted Answer

The answer of A venture's common equity was $50,000 at...

Question 18

A sales growth rate based on the retention of profits is referred to as the:

Accepted Answer

The sustainable sales growth rate is based on the retention of profits, which allows a company to finance its growth without relying on external sources of funding. It takes into account the amount of profits that can be reinvested back into the business while maintaining a stable financial structure. This growth rate is a key metric in determining a company's long-term financial health and sustainability.

Question 19

The increase in accounts payables and accruals that occur with a sales increase is called:

Accepted Answer

The increase in accounts payables and accruals that occur with a sales increase are referred to as spontaneously generated funds. These funds are generated by the operation of the business and do not require any external financing. Choice B is incorrect as additional funds needed refers to the amount of funds needed to finance a specific project or investment. Choice C is incorrect as retained earnings are the profits that the business retains for its own use rather than paying dividends to the shareholders. Choice D is incorrect as financial capital needed refers to the amount of funds required to finance the operations of the business or a specific project.

Question 20

Which of the following would increase a firm's need for additional funds?

Accepted Answer

Increasing the dividend payout rate would result in the firm distributing more of its profits to shareholders and therefore reducing the retained earnings that can be used for future investments. This would increase the need for additional funds to finance new projects or acquisitions. A, B, and C would not directly impact the need for additional funds.

Quiz 9: Projecting Financial Statements