Question 1

Which of the following statements is correct for a firm that has a sustainable growth rate that exceeds its projected growth rate in assets?

Accepted Answer

If a firm's sustainable growth rate exceeds its projected growth rate in assets, it means that the firm can finance its growth internally without relying on external financing (such as issuing debt or equity). Therefore, the internal growth rate will provide the remaining assets needed for the growth.

Question 2

Dividend policy is determined by all of the following except:

Accepted Answer

Forecasting is not a direct determinant of dividend policy; it is more related to predicting future financial performance rather than deciding on dividend distribution.

Question 3

If a firm's sales increased by 12%,and it has no spare capacity,it must increase fixed assets by:

Accepted Answer

If a firm's sales increased by 12% and it has no spare capacity, it means that all of its fixed assets are being utilized. Therefore, to increase sales by 12%, the firm needs to increase its fixed assets by 12% as well. Therefore, the correct answer is D) 12%.

Question 4

A forecast using a percentage of sales model expects sales to increase by 5% annually over the next 4 years.If costs are proportional to sales at 80%,and last year's sales were $1,000,the net income in the fourth year will be:

Accepted Answer

The answer of A forecast using a percentage of sales...

Question 5

What is the internal growth rate for a firm with an ROE of 20%,a dividend payout ratio of 40%,and an equity-to-debt ratio of 60%?

Accepted Answer

IG = (1 − 0.40) × 0.20 × [0.60 / (1 + 0.60)] = 0.0450, or 4.50%

Question 6

Under which of the following capital structures will a firm's internal growth rate exceed its sustainable growth rate?

Accepted Answer

The answer of Under which of the following capital structures...

Question 7

What is the sustainable growth rate for a firm with $250,000 in net income,$20,000 in preferred stock dividends,$80,000 in common stock dividends,and an average equity balance of $1 million?

Accepted Answer

SG = [($250,000 - 20,000 - 80,000)/$250,000] × $250,000/$1m = 0.15, or 15%

Question 8

Relative to its assets,a firm with a large volume of retained earnings and a high ROE:

Accepted Answer

A firm with a large volume of retained earnings and a high ROE already has access to internal funds to fuel growth, so it does not necessarily need to raise additional capital. Therefore, it can generate a higher growth rate without diluting ownership through stock issuances or taking on debt. Increasing the payout ratio would reduce the amount of retained earnings available for reinvestment, and it is not necessarily the best course of action for a company with high potential for growth.

Question 9

Which of the following statements is correct concerning the sustainable growth rate?

Accepted Answer

The sustainable growth rate increases as the payout ratio decreases because more earnings are retained and reinvested in the company, allowing for higher growth. The other statements are incorrect.

Question 10

What new investment is required for a firm that projects 12% growth,has $400,000 in assets,and retained earnings of $40,000?

Accepted Answer

The additional investment required can be calculated using the sustainable growth rate formula:
Sustainable Growth Rate = (Net income/Total assets) * (1-Retention ratio)
= (Net income/Total assets) * (Dividend payout ratio)
Here, we don't have the net income or dividend payout ratio, but we have the ROA (return on assets) = Net income/Total assets = 12%
We can assume a retention ratio of 60% (since dividends are usually around 40%)
Sustainable Growth Rate = 0.12 * 0.6 = 0.072 = 7.2%
Next, we can calculate the additional investment required based on the projected growth rate:
Additional Investment = (Projected growth rate / Sustainable Growth Rate - 1) * Total assets
= (0.12 / 0.072 - 1) * $400,000
= $8,000
Therefore, the best choice is C, $8,000.

Question 11

Which of the following changes will decrease a firm's internal growth rate?

Accepted Answer

The internal growth rate is the maximum rate at which a firm can grow without any external financing. It is determined by the firm's earnings retention rate (1-dividend payout ratio) and return on assets. A decrease in the plowback ratio (earnings retention rate) will decrease the internal growth rate as the firm is retaining less earnings to reinvest in business activities. The other options will either increase net income or decrease dividend payout, which will increase the earnings retention rate and hence, increase the internal growth rate.

Question 12

Which of the following does not provide a "solution" to a projected growth rate in assets that exceeds the sustainable growth rate?

Accepted Answer

Increasing the payout ratio reduces the amount of earnings retained in the business, which decreases the sustainable growth rate, rather than addressing the issue of asset growth exceeding the sustainable growth rate.

Question 13

Sources and uses of funds are made equal through:

Accepted Answer

A balancing item is used to make sure that the sources and uses of funds are equal in financial statements. It represents items that are not explicitly identified but are necessary to bring the balance sheet into balance. This is a commonly used tool in financial accounting to ensure accuracy of financial statements. The other options, such as pro forma financial statements, borrowed cash, or additions to retained earnings, do not directly address the issue of balancing sources and uses of funds.

Question 14

Dave's Wax Inc.'s financial planners have projected a growth rate of 8% for the coming year.Currently,it has assets of $5,000,000 and retained earnings of $120,000.Calculate the amount of external financing Dave will need.

Accepted Answer

The answer of Dave's Wax Inc.'s financial planners have projected...

Question 15

To avoid inconsistency,financial planners should be sure to:

Accepted Answer

The answer of To avoid inconsistency,financial planners should be sure...

Question 16

With respect to the balance sheet,an increase in equity of $2,000 with an increase in net income to $2,500,leads us to believe:

Accepted Answer

The answer of With respect to the balance sheet,an increase...

Question 17

If entering a new market will not produce an immediate net present value,why would financial planners suggest entering this new market?

Accepted Answer

Financial planners may suggest entering a new market that does not produce an immediate net present value because there is a possibility of follow-up investments. This means that while the initial investment may not be profitable immediately, it could generate profits in the future through additional investments or expansion in the market. It may also be a strategic move to diversify the company's portfolio and reduce reliance on a single market, which could minimize risk in the long run.

Question 18

Which effort will help a firm boost its internal growth rate?

Accepted Answer

All of these efforts can help a firm boost its internal growth rate. Plowing back a high proportion of its earnings can provide the necessary funds to invest in new projects and expand operations. Achieving a high return on equity indicates that the firm is generating strong profits, which can also be reinvested into growth opportunities. Maintaining a low debt-to-asset ratio reduces the financial risk of the company and can make it easier to obtain financing for future growth initiatives.

Question 19

Which of the following is not typically included among the three major components of a financial planning model?

Accepted Answer

Intuitions or guesses are not typically considered as a component of a financial planning model. The other three options, inputs, planning model, and outputs, are typically included as major components.

Question 20

If a firm chooses to maintain a fixed debt-equity ratio,it can raise the additional needed funds by:

Accepted Answer

If a firm chooses to maintain a fixed debt-equity ratio, it cannot issue additional stock because that would change the debt-equity ratio. Therefore, the firm must issue additional debt, which becomes the balancing item. Dividends are typically paid out of earnings and are not directly affected by the financing decision.

Quiz 18: Long-Term Financial Planning