Question 1

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 20 percent. What is the internal growth rate?

Accepted Answer

Total assets = $8,600 F1F1F1S1F1F1F10 (1 + 0.60) = $13,760Return on assets = $3,450/$13,760 = .250727Internal growth = [.250727 F1F1F1S1F1F1F10 (1 - 0.20]/[1 - (.250727 F1F1F1S1F1F1F10 (1 - 0.20)] = 25.09 percent

Question 2

Stop and Go has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The total asset turnover is 1.6 and the debt-equity ratio is 0.60. What is the sustainable rate of growth?

Accepted Answer

Return on equity = 0.045 F1F1F1S1F1F1F10 1.60 F1F1F1S1F1F1F10 (1 + 0.60) = 0.1152Sustainable growth = [0.1152 F1F1F1S1F1F1F10 (1 - 0.15)]/{1 - [.1152 F1F1F1S1F1F1F10 (1 - 0.15)]} = 10.85 percent

Question 3

Cross Town Express has sales of $132,000, net income of $12,600, 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/$12,600 = 0.60Retention ratio = 1 - 0.60 = 0.40Sustainable growth = [($12,600/$45,000) F1F1F1S1F1F1F10 0.40]/{1 - [($12,600/$45,000) F1F1F1S1F1F1F10 0.40]} = 0.126126Projected total assets = $98,000 F1F1F1S1F1F1F10 1.126126 = $110,360.35Current debt = $98,000 - $45,000 = $53,000Projected equity = $45,000 + ($12,600 F1F1F1S1F1F1F10 1.126126 F1F1F1S1F1F1F10 0.40) = $50,675.68Net debt required = $110,360.35 - $53,000 - $50,675.68 = $6,685

Question 4

The Cookie Shoppe expects sales of $437,500 next year. The profit margin is 4.8 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 F1F1F1S1F1F1F10 .048 F1F1F1S1F1F1F10 (1 - 0.30) = $14,700

Question 5

Major Manuscripts, Inc. does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm's maximum rate of growth?

Accepted Answer

Retention ratio = ($2,376 - $950)/$2,376 = 0.60Internal growth rate = [($2,376/$20,590) F1F1F1S1F1F1F10 0.60]/{1 - [($2,376/$20,590) F1F1F1S1F1F1F10 0.60]} = 7.44 percent

Question 6

R. N. C., Inc. desires a sustainable growth rate of 4.5 percent while maintaining a 40 percent dividend payout ratio and a 6 percent profit margin. The company has a capital intensity ratio of 1.23. What equity multiplier is required to achieve the company's desired rate of growth?

Accepted Answer

0.045 = [ROE F1F1F1S1F1F1F10 (1 - 0.40)]/{1 - [ROE F1F1F1S1F1F1F10 (1 - 0.40)]}; ROE = .071770.07177 = 0.06 F1F1F1S1F1F1F10 (1/1.23) F1F1F1S1F1F1F10 EM; EM = 1.47

Question 7

The Corner Store has $219,000 of sales and $187,000 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 = $187,000/$251,724.14 = 0.74

Question 8

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 F1F1F1S1F1F1F10 0.10 = $46,800Or, Capital intensity ratio = $468,000/$689,700 = 0.678556Required addition to fixed assets = $689,700 F1F1F1S1F1F1F10 0.10 F1F1F1S1F1F1F10 0.678556 = $46,800

Question 9

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 F1F1F1S1F1F1F10 0.45]/[1 - (ROE F1F1F1S1F1F1F10 0.45)]; ROE = .1297340.129734 = PM F1F1F1S1F1F1F10 (1/1.2) F1F1F1S1F1F1F10 (1 + .064); PM = 14.63 percent

Question 10

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 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

What is Major Manuscripts, Inc.'s retention ratio?

Accepted Answer

Retention ratio = ($2,376 - $950)/$2,376 = 60 percent

Question 13

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 F1F1F1S1F1F1F10 0.75)/[1 - (0.09 F1F1F1S1F1F1F10 0.75)] = 7.24 percent

Question 14

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 15

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

Accepted Answer

The answer of The financial planning process tends to place...

Question 16

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) F1F1F1S1F1F1F10 1.045 = $30,409.50Projected liabilities = $1,200 F1F1F1S1F1F1F10 1.045 = $1,254Current equity = $1,600 + $27,500 - $1,200 = $27,900Projected increase in retained earnings = $29,000 F1F1F1S1F1F1F10 .05 F1F1F1S1F1F1F10 1.045 = $1,515.25Equity funding need = $30,409.50 - $1,254 - $27,900 - $1,515.25 = -$259.75

Question 17

Fresno Salads has current sales of $4,900 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 5 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 = $4,900 F1F1F1S1F1F1F10 .065 F1F1F1S1F1F1F10 (1 + .05) = $334.43

Question 18

A Procrustes approach to financial planning is based on:

Accepted Answer

A Procrustes approach to financial planning involves fitting the financial plan to pre-determined goals or frameworks, often those set by senior management, rather than adapting the plan to the changing environment or specific circumstances of the organization.

Question 19

Designer's Outlet has a capital intensity ratio of 0.87 at full capacity. Currently, total assets are $48,900 and current sales are $52,300. At what level of capacity is the firm currently operating?

Accepted Answer

Total capacity sales = $48,900/0.87 = $56,206.90Current capacity utilization = $52,300/$56,206.90 = 93 percent

Question 20

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 F1F1F1S1F1F1F10 1.30 F1F1F1S1F1F1F10 (1 + 0.55) = 0.18135Sustainable growth = [0.18135 F1F1F1S1F1F1F10 b]/[1 - (0.18135 F1F1F1S1F1F1F10 b)] = .05; b = 0.2626Payout ratio = 1 - 0.2626 = 73.74 percent

Quiz 4: Long-Term Financial Planning and Growth