Question 1

Which one of the following correctly defines the retention ratio?

Accepted Answer

The retention ratio is defined as the addition to retained earnings divided by net income. This ratio indicates the percentage of net income that is retained in the company rather than being paid out as dividends.

Question 2

Financial planning:

Accepted Answer

Financial planning considers multiple options and scenarios for the next two to five years. It is not solely focused on the short-term outlook and is not only used during major changes to a firm. It is also not a one-time process and can provide significant benefits for firms in terms of preparedness and responsiveness to economic changes.

Question 3

When constructing a pro forma statement,net working capital generally:

Accepted Answer

Net working capital refers to the difference between a company's current assets and current liabilities. As sales increase, a company will likely need to invest more in inventory and accounts receivable, leading to an increase in current assets and a corresponding increase in net working capital. Therefore, net working capital varies proportionally with sales in a pro forma statement.

Question 4

A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels.Given this,you can safely assume that the firm:

Accepted Answer

A pro forma statement showing an increase in both sales and fixed assets suggests that the firm is expanding its operations to support higher sales, indicating it was previously operating at full capacity.

Question 5

Which one of the following statements is correct?

Accepted Answer

Pro forma statements are not guarantees and are only projections or estimates of what may happen in the future. They are not based on actual results but rather assumptions and forecasts. The other choices are incorrect as pro forma statements may assume new equity, include dividends and net working capital, and may include more than just a balance sheet and income statement.

Question 6

The sustainable growth rate of a firm is best described as the:

Accepted Answer

The sustainable growth rate of a firm is the maximum growth rate achievable without the need for external equity financing while maintaining a constant debt-equity ratio. This means that the firm is using retained earnings and debt to finance its growth, but is not issuing any new equity. Therefore, choice D, which specifies this definition, is the correct answer.

Question 7

Which one of the following terms is applied to the financial planning method which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values?

Accepted Answer

The percentage of sales method uses the projected sales level as a basis for determining changes in balance sheet and income statement account values. It involves calculating each account as a percentage of sales, and then applying those percentages to the projected sales to determine the expected account balances. This method is commonly used in financial planning and budgeting. The other choices are not applicable to this financial planning method.

Question 8

Financial planning accomplishes which of the following for a firm?
I.determination of asset requirements
II.development of plans to contend with unexpected events
III.establishment of priorities
IV.analysis of funding options

Accepted Answer

Financial planning accomplishes all four of the mentioned tasks for a firm: determination of asset requirements, development of plans to contend with unexpected events, establishment of priorities, and analysis of funding options. Therefore, all choices are correct.

Question 9

Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?

Accepted Answer

The capital intensity ratio measures the amount of assets required to generate $1 in sales. It is calculated as total assets divided by sales. The higher the ratio, the more capital-intensive the business is.

Question 10

When utilizing the percentage of sales approach,managers:
I.estimate company sales based on a desired level of net income and the current profit margin.
II.consider only those assets that vary directly with sales.
III.consider the current production capacity level.
IV.can project both net income and net cash flows.

Accepted Answer

The answer of When utilizing the percentage of sales approach,managers:
I.estimate...

Question 11

A firm is currently operating at full capacity.Net working capital,costs,and all assets vary directly with sales.The firm does not wish to obtain any additional equity financing.The dividend payout ratio is constant at 40 percent.If the firm has a positive external financing need,that need will be met by:

Accepted Answer

Since the firm does not wish to obtain any additional equity financing, the external financing need can be met by either long-term debt or an increase in accounts payable. However, since the firm is already operating at full capacity, an increase in accounts payable might not be a feasible option. Therefore, the best choice is to meet the external financing need by obtaining long-term debt. Additionally, the constant dividend payout ratio implies that the firm is committed to paying out a fixed percentage of earnings as dividends, which makes retained earnings less likely to be available as a source of external financing. Fixed assets are not a suitable option because they do not generate cash flows directly, and a increase in fixed assets would likely require additional financing.

Question 12

Which one of the following is correct in relation to pro forma statements?

Accepted Answer

The answer of Which one of the following is correct...

Question 13

Which one of the following terms is defined as dividends paid expressed as a percentage of net income?

Accepted Answer

Dividend payout ratio is defined as dividends paid expressed as a percentage of net income.

Question 14

The internal growth rate of a firm is best described as the:

Accepted Answer

The internal growth rate of a firm is the maximum growth rate a firm can achieve without resorting to external financing, which means it relies solely on its own operations and reinvested earnings to finance any growth.

Question 15

You are getting ready to prepare pro forma statements for your business.Which one of the following are you most apt to estimate first as you begin this process?

Accepted Answer

Sales forecast is the most important factor to estimate first as all other projections will depend on the anticipated level of sales. Once sales figures are estimated, other projections like expenses, net income, and financing needs can be calculated more accurately. Therefore, a sales forecast is the foundation on which the other projections are built.

Question 16

Atlas Industries combines the smaller investment proposals from each operational unit into a single project for planning purposes.This process is referred to as which one of the following?

Accepted Answer

The process of combining smaller investment proposals from different operational units into a single project for planning purposes is called aggregation. The other answer choices are not relevant to this concept.

Question 17

Which one of the following statements concerning financial planning for a firm is correct?

Accepted Answer

Financial plans often contain alternative options based on economic developments, allowing for flexibility in decision-making based on changing circumstances. The other options are incorrect because financial planning for fixed assets may be done on a consolidated basis, financial plans should not contain conflicting goals, financial plans typically assume some level of external financing, and the financial planning process may be based on multiple economic assumptions.

Question 18

Phil is working on a financial plan for the next three years.This time period is referred to as which one of the following?

Accepted Answer

The planning horizon is the time period that an individual or organization looks ahead to create a financial plan. In this case, Phil is planning for the next three years, which makes the planning horizon equal to three years. Options A, C, D, and E do not accurately describe the time period for which Phil is creating his financial plan.

Question 19

You are developing a financial plan for a corporation.Which of the following questions will be considered as you develop this plan?
I.How much net working capital will be needed?
II.Will additional fixed assets be required?
III.Will dividends be paid to shareholders?
IV.How much new debt must be obtained?

Accepted Answer

Developing a financial plan for a corporation involves considering all aspects of the company's finances, including net working capital needs (I), the requirement for additional fixed assets (II), dividend payments to shareholders (III), and the necessity to obtain new debt (IV). These elements are crucial for ensuring the company's financial health and strategic growth.

Question 20

Which of the following questions are appropriate to address during the financial planning process?
I.Should the firm merge with a competitor?
II.Should additional shares of stock be sold?
III.Should a particular division be sold?
IV.Should a new product be introduced?

Accepted Answer

All the options (I, II, III, and IV) are appropriate to address during the financial planning process as they all involve significant financial decisions that can impact a firm's capital structure, revenue streams, and market positioning.

Quiz 4: Long-Term Financial Planning and Growthpart Three: Valuation of Future Cash Flows