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Exam 4: Long-Term Financial Planning and Growth

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Question 31

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

A) financial range
B) planning horizon
C) planning agenda
D) short-run
E) current financing period

F) A) and B)
G) None of the above

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Question 32

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Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year?

A) The pro forma profit margin is equal to the current profit margin.
B) Retained earnings will increase at the same rate as sales.
C) Total assets will increase at the same rate as sales.
D) Long-term debt will increase in direct relation to sales.
E) Owners' equity will remain constant.

F) A) and B)
G) A) and C)

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Question 33

Multiple Choice

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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.

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?

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?

A) What are the assumptions that underlie the internal growth rate and B) what are the implications of this rate?

What is the sustainable growth rate assuming the following ratios are constant?

What are the pro forma retained earnings for next year if Fake Stone, Inc. grows at a rate of 2.5 percent and both the profit margin and the dividend payout ratio remain constant?

Hungry Howie's is currently operating at 78 percent of capacity. What is the full-capacity level of sales?

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?

Fixed Appliance Co. wishes to maintain a growth rate of 8 percent a year, a constant debt-equity ratio of 0.34, and a dividend payout ratio of 52 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve?

Financial plans generally tend to ignore which one of the following?

Which one of the following correctly defines the retention ratio?

Which of the following can affect a firm's sustainable rate of growth? I. capital intensity ratio II. profit margin III. dividend policy IV. debt-equity ratio

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?

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

Seaweed Mfg., Inc. is currently operating at only 81 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed?

Assume the profit margin and the payout ratio of Major Manuscripts, Inc. are constant. If sales increase by 6 percent, what is the pro forma retained earnings?

The sustainable growth rate:

Assume that Fake Stone, Inc. is operating at full capacity. Also assume that assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. What is the external financing need if sales increase by 12 percent?