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Exam 4: Long-Term Financial Planning and Corporate Growth

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Question 171

Multiple Choice

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Generally, fixed assets only vary directly with sales when the firm:

A) Maintains a constant retention ratio.
B) Projects a sales increase of 10% or more.
C) Issues new equity.
D) Is operating at full capacity.
E) Reaches the sustainable level of growth.

F) C) and D)
G) B) and D)

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Question 172

Multiple Choice

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One of the primary weaknesses of many financial planning models is that they:

A) Rely too much on financial relationships and too little on accounting relationships.
B) Are iterative in nature.
C) Ignore the goals and objectives of senior management.
D) Are based solely on best case assumptions.
E) Ignore the size, risk, and timing of cash flows.

F) A) and E)
G) A) and B)

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Question 173

Multiple Choice

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Nagel's Industries has a capital intensity ratio of 1.26 at full operating capacity. This means that the firm:

What is the pro forma retained earnings if Delalo, Inc. grows at a rate of 3.76% and both the profit margin and the dividend payout ratio remain constant?

Jack's currently has $798,200 in sales and is operating at 73% of the firm's capacity. What is the full capacity level of sales?

Given the following information: sales = $450; costs = $400; tax rate = 34%. Assuming costs run at a constant percentage of sales, if sales rise by 10% next year, what will net income be?

Moore Money Inc. has a profit margin of 11% and a retention ratio of 70%. Last year, the firm had sales of $500 and total assets of $1,000. The desired total debt ratio is 75%. What is the firm's sustainable growth rate?

The designated source(s) of external financing required to make the pro forma balance sheet balance is called the:

All else the same, greater depreciation expense would likely be associated with a firm which has a high capital intensity ratio, relative to other firms in the same industry.

Conventional wisdom holds that financial plans don't work, but financial planning does.

Kurt's Adventures is operating at full capacity with a sales level of $1,200 and fixed assets of $900. What is the required addition to fixed assets if sales are to increase by 20 percent?

Financial planning is important because the only way for a firm to prosper is for it to grow.

Given the following information: sales = $450, costs = $350, tax rate = 34%, retention ratio = 30%, production = 95% of capacity, sales increase = 10%. What is the expected addition to retained earnings? (Assume costs change directly with sales.)

Fixed assets are often said to grow in a "stair-step" like manner. What does this mean? Why is this a better way to explain the growth of fixed assets as compared to saying that fixed assets grow proportionally with sales?

The long-range time period, usually the next two to five years, over which the financial planning process focuses is known as the:

Consider that you are a finance manager, and one of your junior staff wanted an explanation of the term internal growth rate. Provide a definition that conveys what the term means from a finance perspective.

Very few financial planning models require an externally supplied sales forecast.

A firm wants to maintain a growth rate of 5% without incurring any additional equity financing. The firm maintains a constant debt-equity ratio of.4, a total asset turnover ratio of 1.15, and a profit margin of 7 percent. What must the retention ratio be?

Consider a firm which forecasts that costs, assets, and current liabilities will all change proportionately with sales and the dividend payout ratio will remain fixed. How will the firm's ROE change as a result of a forecast 30% increase in sales? How will the individual components of ROE (the Du Pont identity) change? Why?

If a firm lowers its dividend payout ratio, then the firm's: