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Exam 4: Long-Term Financial Planning and Growth

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Question 1

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

A) Financial planning for fixed assets is done on a segregated basis within each division.
B) Financial plans often contain alternative options based on economic developments.
C) Financial plans frequently contain conflicting goals.
D) Financial plans assume that firms obtain no additional external financing.
E) The financial planning process is based on a single set of economic assumptions.

F) C) and E)
G) A) and E)

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Question 2

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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?

A) $3,276
B) $4,680
C) $28,400
D) $32,760
E) $46,800

F) A) and E)
G) A) and D)

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Question 3

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Hungry Howie's is currently operating at full capacity. The profit margin and the dividend payout ratio are held constant. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 11 percent. What is the external financing needed?

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?

A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10 percent. What must the debt-equity ratio be if the firm wishes to keep that ratio constant?

Seaweed Mfg., Inc. is currently operating at only 86 percent of fixed asset capacity. Fixed assets are $387,000. Current sales are $510,000 and are projected to grow to $664,000. What amount must be spent on new fixed assets to support this growth in sales?

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

The most recent financial statements for Heng Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued?

A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent. The current profit margin is 10 percent and the firm uses no external financing sources. What must the total asset turnover rate be?

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?

If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income and excess capacity, then the:

Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth?

The profit margin, the debt-equity ratio, and the dividend payout ratio for Fake Stone, Inc. are constant. Sales are expected to increase by $1,062 next year. What is the projected addition to retained earnings for next year?

A firm's net working capital and all of its expenses vary directly with sales. The firm is operating currently at 96 percent of capacity. The firm wants no additional external financing of any kind. Which one of the following statements related to the firm's pro forma statements for next year must be correct?

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

If Major Manuscripts, Inc. decides to maintain a constant debt-equity ratio, what rate of growth can it maintain assuming that no additional external equity financing is available.

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?

The external financing need:

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?

Which one of the following will cause the sustainable growth rate to equal to internal growth rate?