Chap 4 XS

Chapter 4: Financial Planning
A. True/False Questions (5)
1. Phil is working on a financial plan for the next three years. This time period is
referred to planning horizon?
True
False
2. A percentage of sales method uses the projected sales level as the basis for
determining changes in balance sheet and income statement account values?
True
False
3. Financial planning is a process that firms undergo once every five years
True
False
4. Pro forma statements are limited to a balance sheet and income statement.
True
False
5. The plowback ratio is equal to net income divided by the change in total equity.
True
False
B. Short answer questions (5)
1. What are the pros and cons of raising capital of enterprises through borrowing from
a bank?
2. Explain the sale approach to financial planning? What are the pros and cons of this
approach?
3. Using the sale approach, Tudo company just completed a pro forma with an external
financing need of +10 billion VND. What are the firm's options in this case?
4. What is the implication of the internal rates of growth?
5. What is the implication of the sustainable rates of growth?
1
C. Multiple Choice Questions (10)
1. 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?
A. I and IV only
B. II and III only
C. II, III and IV only
D. I, II, III, and IV
2. Which one of the following policies most directly affects the projection of the
retained earnings balance to be used on a pro forma statement?
A. net working capital policy
B. capital structure policy
C. dividend policy
D. capital budgeting policy
3. 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.
A. I and II only
B. II and III only
C. III and IV only
D. I, III, and IV only
4. 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.
2
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.
5. 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?
A. -$259.75
B. -$201.19
C. $967.30
D. $1,099.08
6. 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?
A. $31,755 B. $36,250 C. $48,667 D. $54,500
7. Stop and Go has a 4.5 percent profit margin and an 18 percent dividend payout ratio.
The total asset turnover is 1.6 and the debt-equity ratio is 0.45. What is the
sustainable rate of growth?
A. 8.54 percent B. 8.89 percent C. 9.26 percent D. 9.36 percent
8. 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. 26.26 percent B. 38.87 percent C. 61.13 percent
D. 73.74 percent
9. The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio.
What is the internal growth rate?
A. 6.50 percent
B. 6.75 percent
C. 6.97 percent
D. 7.24 percent
10. Cross Town Express has sales of $137,000, net income of $14,000, total assets of
$98,000, and total equity of $45,000. The firm paid $7,560 in dividends and
3
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?
A. $0
B. $6,311 C. $6,989
D. $8,852
D. Exercise
1. The most recent financial statements for GPS, Inc., are shown here:
Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,400
was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales
are projected to be $21,840. What is the external financing needed?
2. The most recent financial statements for Moose Tours, Inc., follow. Sales for 2009 are
projected to grow by 20 percent. Interest expense will remain constant; the tax rate and
the dividend payout rate will also remain constant. Costs, other expenses, current assets,
and accounts payable increase spontaneously with sales. If the firm is operating at full
capacity and no new debt or equity is issued, what external financing is needed to
support the 20 percent growth rate in sales?
4
3. Based on the following information, calculate the sustainable growth rate for Kaleb’s
Kickboxing:
Profit margin: 8.2%
Capital intensity ratio: 0.75
Debt–equity ratio: 0.4
Net income: $ 43.000
Dividends: $12.000
4. The most recent financial statements for Live Co. are shown here:
5
Assets and costs are proportional to sales. Debt and equity are not. The company maintains
a constant 30 percent dividend payout ratio. No external equity financing is possible. What
is the internal growth rate? What is the sustainable growth rate?
5. Seaweed Mfg., Inc., is currently operating at only 95 percent of fixed asset capacity.
Current sales are $550,000. How fast can sales grow before any new fixed assets are
needed? Suppose fixed assets are $440,000 and sales are projected to grow to $630,000.
How much in new fixed assets are required to support this growth in sales? Assume the
company maintains its current operating capacity

Chap 4 XS

Uploaded by

Copyright:

Available Formats

Chap 4 XS

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap 4 XS

Uploaded by

Copyright:

Available Formats

Chapter 4: Financial Planning

A. True/False Questions (5)

B. Short answer questions (5)

3. When utilizing the percentage of sales approach, managers:

6. Gladsden Refinishers currently has $21,900 in sales and is operating at 45 percent

You might also like