Chap 004

Chapter 04 - Long-Term Financial Planning and Growth
Chapter 04
Long-Term Financial Planning and Growth

Multiple Choice Questions

1. Phil is working on a financial plan for the next three ears. This time period is referred to as
which one of the following!
". financial range
#. planning hori$on
C. planning agenda
%. short-r&n
'. c&rrent financing period

(. "tlas )nd&stries com*ines the smaller in+estment proposals from each operational &nit into
a single pro,ect for planning p&rposes. This process is referred to as which one of the
following!
". con,oining
#. aggregation
C. conglomeration
%. appropriation
'. s&mmation

-. .hich one of the following terms is applied to the financial planning method which &ses
the pro,ected sales le+el as the *asis for determining changes in *alance sheet and income
statement acco&nt +al&es!
". percentage of sales method
#. sales dil&tion method
C. sales reconciliation method
%. common-si$e method
'. trend method

4-1
4. .hich one of the following terms is defined as di+idends paid expressed as a percentage of
net income!
". di+idend retention ratio
#. di+idend ield
C. di+idend pao&t ratio
%. di+idend portion
'. di+idend section

/. .hich one of the following correctl defines the retention ratio!
". one pl&s the di+idend pao&t ratio
#. addition to retained earnings di+ided * net income
C. addition to retained earnings di+ided * di+idends paid
%. net income min&s additions to retained earnings
'. net income min&s cash di+idends

0. .hich one of the following ratios identifies the amo&nt of assets a firm needs in order to
generate 11 in sales!
". c&rrent ratio
#. e2&it m&ltiplier
C. retention ratio
%. capital intensit ratio
'. pao&t ratio

3. The internal growth rate of a firm is *est descri*ed as the4
". minim&m growth rate achie+a*le ass&ming a 100 percent retention ratio.
#. minim&m growth rate achie+a*le if the firm maintains a constant e2&it m&ltiplier.
C. maxim&m growth rate achie+a*le excl&ding external financing of an kind.
%. maxim&m growth rate achie+a*le excl&ding an external e2&it financing while
maintaining a constant de*t-e2&it ratio.
'. maxim&m growth rate achie+a*le with &nlimited de*t financing.

4-(
5. The s&staina*le growth rate of a firm is *est descri*ed as the4

6. 7o& are de+eloping a financial plan for a corporation. .hich of the following 2&estions
will *e considered as o& de+elop this plan!
). 8ow m&ch net working capital will *e needed!
)). .ill additional fixed assets *e re2&ired!
))). .ill di+idends *e paid to shareholders!
)9. 8ow m&ch new de*t m&st *e o*tained!
". ) and )9 onl
#. )) and ))) onl
C. ): ))): and )9 onl
%. )): ))): and )9 onl
'. ): )): ))): and )9

10. Financial planning4
". foc&ses solel on the short-term o&tlook for a firm.
#. is a process that firms emplo onl when ma,or changes to a firm;s operations are
anticipated.
C. is a process that firms &ndergo once e+er fi+e ears.
%. considers m&ltiple options and scenarios for the next two to fi+e ears.
'. pro+ides minimal *enefits for firms that are highl responsi+e to economic changes.

4--
11. Financial planning accomplishes which of the following for a firm!
). determination of asset re2&irements
)). de+elopment of plans to contend with &nexpected e+ents
))). esta*lishment of priorities
)9. analsis of f&nding options
". ) and ))) onl
#. )) and )9 onl
C. ): ))): and )9 onl
%. ): )): and ))) onl
'. ): )): ))): and )9

1(. .hich of the following 2&estions are appropriate to address d&ring the financial planning
process!
). <ho&ld the firm merge with a competitor!
)). <ho&ld additional shares of stock *e sold!
))). <ho&ld a partic&lar di+ision *e sold!
)9. <ho&ld a new prod&ct *e introd&ced!
". ): )): and ))) onl
#. ): )): and )9 onl
C. ): ))): and )9 onl
%. )): ))): and )9 onl
'. ): )): ))): and )9

1-. .hich one of the following statements concerning financial planning for a firm is
correct!
". Financial planning for fixed assets is done on a segregated *asis within each di+ision.
#. Financial plans often contain alternati+e options *ased on economic de+elopments.
C. Financial plans fre2&entl contain conflicting goals.
%. Financial plans ass&me that firms o*tain no additional external financing.
'. The financial planning process is *ased on a single set of economic ass&mptions.

4-4
14. 7o& are getting read to prepare pro forma statements for o&r *&siness. .hich one of the
following are o& most apt to estimate first as o& *egin this process!
". fixed assets
#. c&rrent expenses
C. sales forecast
%. pro,ected net income
'. external financing need

1/. .hich one of the following statements is correct!
". Pro forma statements m&st ass&me that no new e2&it is iss&ed.
#. Pro forma statements are pro,ections: not g&arantees.
C. Pro forma statements are limited to a *alance sheet and income statement.
%. Pro forma financial statements m&st ass&me that no di+idends will *e paid.
'. =et working capital needs are excl&ded from pro forma comp&tations.

10. .hen &tili$ing the percentage of sales approach: managers4
). estimate compan sales *ased on a desired le+el of net income and the c&rrent profit
margin.
)). consider onl those assets that +ar directl with sales.
))). consider the c&rrent prod&ction capacit le+el.
)9. can pro,ect *oth net income and net cash flows.
". ) and )) onl
#. )) and ))) onl
C. ))) and )9 onl
%. ): ))): and )9 onl
'. )): ))): and )9 onl

13. .hich one of the following is correct in relation to pro forma statements!
". Fixed assets m&st increase if sales are pro,ected to increase.
#. =et working capital is affected onl when a firm;s sales are expected to exceed the firm;s
c&rrent prod&ction capacit.
C. The addition to retained earnings is e2&al to net income pl&s di+idends paid.
%. Long-term de*t +aries directl with sales when a firm is c&rrentl operating at maxim&m
capacit.
'. )n+entor changes are directl proportional to sales changes.

4-/
15. .hen constr&cting a pro forma statement: net working capital generall4
". remains fixed.
#. +aries onl if the firm is c&rrentl prod&cing at f&ll capacit.
C. +aries onl if the firm maintains a fixed de*t-e2&it ratio.
%. +aries onl if the firm is prod&cing at less than f&ll capacit.
'. +aries proportionall with sales.

16. " pro forma statement indicates that *oth sales and fixed assets are pro,ected to increase
* 3 percent o+er their c&rrent le+els. Gi+en this: o& can safel ass&me that the firm4
". is pro,ected to grow at the internal rate of growth.
#. is pro,ected to grow at the s&staina*le rate of growth.
C. c&rrentl has excess capacit.
%. is c&rrentl operating at f&ll capacit.
'. retains all of its net income.

(0. " firm is c&rrentl operating at f&ll capacit. =et working capital: costs: and all assets
+ar directl with sales. The firm does not wish to o*tain an additional e2&it financing. The
di+idend pao&t ratio is constant at 40 percent. )f the firm has a positi+e external financing
need: that need will *e met *4
". acco&nts paa*le.
#. long-term de*t.
C. fixed assets.
%. retained earnings.
'. common stock.

(1. .hich one of the following policies most directl affects the pro,ection of the retained
earnings *alance to *e &sed on a pro forma statement!
". net working capital polic
#. capital str&ct&re polic
C. di+idend polic
%. capital *&dgeting polic
'. capacit &tili$ation polic

4-0
((. 7o& are comparing the c&rrent income statement of a firm to the pro forma income
statement for next ear. The pro forma is *ased on a fo&r percent increase in sales. The firm is
c&rrentl operating at 5/ percent of capacit. =et working capital and all costs +ar directl
with sales. The tax rate and the di+idend pao&t ratio are fixed. Gi+en this information: which
one of the following statements m&st *e tr&e!
". The pro,ected net income is e2&al to the c&rrent ear;s net income.
#. The tax rate will increase at the same rate as sales.
C. >etained earnings will increase * fo&r percent o+er its c&rrent le+el.
%. Total assets will increase * less than fo&r percent.
'. Total lia*ilities and owners; e2&it will increase * fo&r percent.

(-. " firm is operating at 60 percent of capacit. This information is primaril needed to
pro,ect which one of the following acco&nt +al&es when compiling pro forma statements!
". sales
#. costs of goods sold
C. acco&nts recei+a*le
%. fixed assets
'. long-term de*t

(4. .hich one of the following capital intensit ratios indicates the largest need for fixed
assets per dollar of sales!
". 0.30
#. 0.50
C. 1.00
%. 1.00
'. 1.1/

4-3
(/. .hich of the following are needed to determine the amo&nt of fixed assets re2&ired to
s&pport each dollar of sales!
). c&rrent amo&nt of fixed assets
)). c&rrent sales
))). c&rrent le+el of operating capacit
)9. pro,ected growth rate of sales
". ) and ))) onl
#. )) and )9 onl
C. ): )): and ))) onl
%. )): ))): and )9 onl
'. ): )): ))): and )9

(0. The plow*ack ratio is4
". e2&al to net income di+ided * the change in total e2&it.
#. the percentage of net income a+aila*le to the firm to f&nd f&t&re growth.
C. e2&al to one min&s the retention ratio.
%. the change in retained earnings di+ided * the di+idends paid.
'. the dollar increase in net income di+ided * the dollar increase in sales.

(3. " firm;s net working capital and all of its expenses +ar directl with sales. The firm is
operating c&rrentl at 60 percent of capacit. The firm wants no additional external financing
of an kind. .hich one of the following statements related to the firm;s pro forma statements
for next ear m&st *e correct!
". Total lia*ilities will remain constant at this ear;s +al&e.
#. The maxim&m rate of sales increase is 4 percent.
C. The firm cannot exceed its internal rate of growth.
%. The pro,ected owners; e2&it will e2&al this ear;s ending e2&it *alance.
'. Fixed assets m&st remain constant at the c&rrent le+el.

(5. .hich one of the following will increase the maxim&m rate of growth a corporation can
achie+e!
". a+oidance of external e2&it financing
#. increase in corporate tax rates
C. red&ction in the retention ratio
%. decrease in the di+idend pao&t ratio
'. decrease in sales gi+en a positi+e profit margin

4-5
(6. ?artin "erospace is c&rrentl operating at f&ll capacit *ased on its c&rrent le+el of assets.
<ales are expected to increase * 4./ percent next ear: which is the firm;s internal rate of
growth. =et working capital and operating costs are expected to increase directl with sales.
The interest expense will remain constant at its c&rrent le+el. The tax rate and the di+idend
pao&t ratio will *e held constant. C&rrent and pro,ected net income is positi+e. .hich one of
the following statements is correct regarding the pro forma statement for next ear!
". The pro forma profit margin is e2&al to the c&rrent profit margin.
#. >etained earnings will increase at the same rate as sales.
C. Total assets will increase at the same rate as sales.
%. Long-term de*t will increase in direct relation to sales.
'. @wners; e2&it will remain constant.

-0. " firm;s external financing need is financed * which of the following!
". retained earnings
#. net working capital and retained earnings
C. net income and retained earnings
%. de*t or e2&it
'. owners; e2&it: incl&ding retained earnings

-1. <ales can often increase witho&t increasing which one of the following!
". acco&nts recei+a*le
#. cost of goods sold
C. acco&nts paa*le
%. fixed assets
'. in+entor

-(. #lasco )nd&stries is c&rrentl at f&ll-capacit sales. .hich one of the following is limiting
sales to this le+el!
". net working capital
#. long-term de*t
C. in+entor
%. fixed assets
'. de*t-e2&it ratio

4-6
--. "ll else constant: which one of the following will increase the internal rate of growth!
". decrease in the retention ratio
#. decrease in net income
C. increase in the di+idend pao&t ratio
%. decrease in total assets
'. increase in costs of goods sold

-4. The external financing need4
". will limit growth if &nf&nded.
#. is &naffected * the di+idend pao&t ratio.
C. m&st *e f&nded * long-term de*t.
%. ignores an changes in retained earnings.
'. considers onl the re2&ired increase in fixed assets.

-/. .hich one of the following will ca&se the s&staina*le growth rate to e2&al to internal
growth rate!
". di+idend pao&t ratio greater than 1.0
#. de*t-e2&it ratio of 1.0
C. retention ratio *etween 0.0 and 1.0
%. e2&it m&ltiplier of 1.0
'. $ero di+idend paments

-0. The s&staina*le growth rate4
". ass&mes there is no external financing of an kind.
#. ass&mes no additional long-term de*t is a+aila*le.
C. ass&mes the de*t-e2&it ratio is constant.
%. ass&mes the de*t-e2&it ratio is 1.0.
'. ass&mes all income is retained * the firm.

4-10
-3. )f a firm e2&ates its pro forma sales growth to the rate of s&staina*le growth: and has
positi+e net income and excess capacit: then the4
". maxim&m capacit le+el will ha+e to increase at the same rate as sales growth.
#. total assets will ha+e to increase at the same rate as sales growth.
C. de*t-e2&it ratio will increase.
%. retained earnings will increase.
'. n&m*er of common shares o&tstanding will increase.

-5. <al;s Pi$$a has a di+idend pao&t ratio of 10 percent. The firm does not want to iss&e
additional e2&it shares *&t does want to maintain its c&rrent de*t-e2&it ratio and its c&rrent
di+idend polic. The firm is profita*le. .hich one of the following defines the maxim&m rate
at which this firm can grow!
". internal growth rate A1 - 0.10B
#. s&staina*le growth rate A1 - 0.10B
C. internal growth rate
%. s&staina*le growth rate
'. $ero percent

-6. .hich of the following can affect a firm;s s&staina*le rate of growth!
). capital intensit ratio
)). profit margin
))). di+idend polic
)9. de*t-e2&it ratio
". ))) onl
#. ) and ))) onl
C. )): ))): and )9 onl
%. ): )): and )9 onl
'. ): )): ))): and )9

40. Financial plans generall tend to ignore which one of the following!
". di+idend polic
#. manager;s goals and o*,ecti+es
C. risks associated with cash flows
%. operating capacit le+els
'. capital str&ct&re polic

4-11
41. The financial planning process tends to place the least emphasis on which one of the
following!
". growth limitations
#. capacit &tili$ation
C. market +al&e of a firm
%. capital str&ct&re of a firm
'. di+idend polic

4(. The financial planning process4
). in+ol+es internal negotiations among di+isions.
)). 2&antifies senior manager;s goals.
))). considers onl internal factors.
)9. reconciles compan acti+ities across di+isions.
". ))) and )9 onl
#. )) and ))) onl
C. ): )): and )9 onl
%. )): ))): and )9 onl
'. ): )): ))): and )9

4-. " Procr&stes approach to financial planning is *ased on4
". a polic of prod&cing a financial plan once e+er fi+e ears.
#. de+eloping a plan aro&nd the goals of senior managers.
C. a proacti+e approach to the economic o&tlook.
%. a flexi*le capital *&dget.
'. a flexi*le capital str&ct&re.

44. Fresno <alads has c&rrent sales of 14:600 and a profit margin of 0./ percent. The firm
estimates that sales will increase * / percent next ear and that all costs will +ar in direct
relationship to sales. .hat is the pro forma net income!
". 1-0-.--
#. 1-(3.15
C. 1--4.4-
%. 1--5.30
'. 1-41.10

4-1(
4/. .agner )nd&strial ?otors: which is c&rrentl operating at f&ll capacit: has sales of
1(6:000: c&rrent assets of 11:000: c&rrent lia*ilities of 11:(00: net fixed assets of 1(3:/00: and
a / percent profit margin. The firm has no long-term de*t and does not plan on ac2&iring an.
The firm does not pa an di+idends. <ales are expected to increase * 4./ percent next ear.
)f all assets: short-term lia*ilities: and costs +ar directl with sales: how m&ch additional
e2&it financing is re2&ired for next ear!
". -1(/6.3/
#. -1(01.16
C. 1603.-0
%. 11:066.05
'. 11:/1/.(/

40. The Cookie <hoppe expects sales of 14-3:/00 next ear. The profit margin is 4.5 percent
and the firm has a -0 percent di+idend pao&t ratio. .hat is the pro,ected increase in retained
earnings!
". 114:300
#. 113:/00
C. 115:-00
%. 1(0:000
'. 1(1:000

43. Gladsden >efinishers c&rrentl has 1(1:600 in sales and is operating at 4/ percent of the
firm;s capacit. .hat is the f&ll capacit le+el of sales!
". 1-1:3//
#. 1-0:(/0
C. 145:003
%. 1/1:---
'. 1/4:/00

45. The Corner <tore has 1(16:000 of sales and 1153:000 of total assets. The firm is operating
at 53 percent of capacit. .hat is the capital intensit ratio at f&ll capacit!
". 0.0(
#. 0.05
C. 0.34
%. 1.-/
'. 1.43

4-1-
46. ?iller #ros. 8ardware is operating at f&ll capacit with a sales le+el of 1056:300 and
fixed assets of 1405:000. The profit margin is 3 percent. .hat is the re2&ired addition to fixed
assets if sales are to increase * 10 percent!
". 1-:(30
#. 14:050
C. 1(5:400
%. 1-(:300
'. 140:500

/0. %esigner;s @&tlet has a capital intensit ratio of 0.53 at f&ll capacit. C&rrentl: total assets
are 145:600 and c&rrent sales are 1/(:-00. "t what le+el of capacit is the firm c&rrentl
operating!
". 56 percent
#. 61 percent
C. 6- percent
%. 60 percent
'. 65 percent

/1. ?onika;s %inor is operating at 64 percent of its fixed asset capacit and has c&rrent sales
of 1011:000. 8ow m&ch can the firm grow *efore an new fixed assets are needed!
". 4.66 percent
#. /.35 percent
C. 0.0( percent
%. 0.-5 percent
'. 0.36 percent

/(. <top and Go has a 4./ percent profit margin and a 1/ percent di+idend pao&t ratio. The
total asset t&rno+er is 1.0 and the de*t-e2&it ratio is 0.00. .hat is the s&staina*le rate of
growth!
". 6.1- percent
#. 6./4 percent
C. 6.56 percent
%. 10.(0 percent
'. 10.5/ percent

4-14
/-. >. =. C.: )nc. desires a s&staina*le growth rate of 4./ percent while maintaining a 40
percent di+idend pao&t ratio and a 0 percent profit margin. The compan has a capital
intensit ratio of 1.(-. .hat e2&it m&ltiplier is re2&ired to achie+e the compan;s desired
rate of growth!
". 1.--
#. 1.-5
C. 1.4(
%. 1.43
'. 1./-

/4. " firm has a retention ratio of 4/ percent and a s&staina*le growth rate of 0.( percent. The
capital intensit ratio is 1.( and the de*t-e2&it ratio is 0.04. .hat is the profit margin!
". 0.(5 percent
#. 3.03 percent
C. 6.43 percent
%. 1(.-5 percent
'. 14.0- percent

//. Frasier Ca*inets wants to maintain a growth rate of / percent witho&t inc&rring an
additional e2&it financing. The firm maintains a constant de*t-e2&it ratio of .0.//: a total
asset t&rno+er ratio of 1.-0: and a profit margin of 6.0 percent. .hat m&st the di+idend pao&t
ratio *e!
". (0.(0 percent
#. -5.53 percent
C. 46.(6 percent
%. 01.1- percent
'. 3-.34 percent

4-1/
/0. Cross Town 'xpress has sales of 11-(:000: net income of 11(:000: total assets of 165:000:
and total e2&it of 14/:000. The firm paid 13:/00 in di+idends and maintains a constant
di+idend pao&t ratio. C&rrentl: the firm is operating at f&ll capacit. "ll costs and assets
+ar directl with sales. The firm does not want to o*tain an additional external e2&it. "t
the s&staina*le rate of growth: how m&ch new total de*t m&st the firm ac2&ire!
". 10
#. 14:-11
C. 1/:656
%. 10:(03
'. 10:05/

/3. The Two <isters has a 6 percent ret&rn on assets and a 3/ percent retention ratio. .hat is
the internal growth rate!
". 0./0 percent
#. 0.3/ percent
C. 0.63 percent
%. 3.(4 percent
'. 3.-5 percent

/5. The %og 8o&se has net income of 1-:4/0 and total e2&it of 15:000. The de*t-e2&it ratio
is 0.00 and the pao&t ratio is (0 percent. .hat is the internal growth rate!
". 14.43 percent
#. 13.35 percent
C. (/.06 percent
%. (6.40 percent
'. --.-- percent

4-10

/6. .hat is ?a,or ?an&scripts: )nc.;s retention ratio!
". -- percent
#. 40 percent
C. /0 percent
%. 00 percent
'. 03 percent

4-13
00. ?a,or ?an&scripts: )nc. does not want to inc&r an additional external financing. The
di+idend pao&t ratio is constant. .hat is the firm;s maxim&m rate of growth!
". 3.44 percent
#. 3.35 percent
C. 6.(0 percent
%. 6.3/ percent
'. 10.60 percent

01. )f ?a,or ?an&scripts: )nc. decides to maintain a constant de*t-e2&it ratio: what rate of
growth can it maintain ass&ming that no additional external e2&it financing is a+aila*le.
". 10.(- percent
#. 10.46 percent
C. 10.60 percent
%. 11.(3 percent
'. 11.0/ percent

0(. ?a,or ?an&scripts: )nc. is c&rrentl operating at maxim&m capacit. "ll costs: assets: and
c&rrent lia*ilities +ar directl with sales. The tax rate and the di+idend pao&t ratio will
remain constant. 8ow m&ch additional de*t is re2&ired if no new e2&it is raised and sales are
pro,ected to increase * 5 percent!
". -11/3
#. -105
C. 1(41
%. 1-45
'. 1-03

0-. ?a,or ?an&scripts: )nc. is c&rrentl operating at 5/ percent of capacit. "ll costs and net
working capital +ar directl with sales. The tax rate: the profit margin: and the di+idend
pao&t ratio will remain constant. 8ow m&ch additional de*t is re2&ired if no new e2&it is
raised and sales are pro,ected to increase * 1/ percent!
". -1510
#. -13/0
C. -104(
%. 1(44
'. 1-/5

4-15
04. "ss&me the profit margin and the pao&t ratio of ?a,or ?an&scripts: )nc. are constant. )f
sales increase * 0 percent: what is the pro forma retained earnings!
". 1/:((0.15
#. 1/:3(1.4(
C. 10:0(1./0
%. 10:045.4(
'. 13:0(5./0

0/. "ss&me that ?a,or ?an&scripts: )nc. is c&rrentl operating at 6/ percent of capacit and
that sales are pro,ected to increase to 1(0:000. .hat is the pro,ected addition to fixed assets!
". 10
#. 11:46-
C. 11:/(6
%. 11:/40
'. 11:/55

4-16

00. "ll of Fake <tone;s costs and net working capital +ar directl with sales. <ales are
pro,ected to increase * -./ percent. .hat is the pro forma acco&nts recei+a*le *alance for
next ear!
". 11:0/6.50
#. 11:001.54
C. 11:350.(0
%. 11:353.50
'. 11:500.40

4-(0
03. The profit margin: the de*t-e2&it ratio: and the di+idend pao&t ratio for Fake <tone: )nc.
are constant. <ales are expected to increase * 11:00( next ear. .hat is the pro,ected
addition to retained earnings for next ear!
". 16(.-4
#. 1155.//
C. 11:606.10
%. 1(:144.-4
'. 1(:-50.05

05. "ss&me that Fake <tone: )nc. is operating at f&ll capacit. "lso ass&me that all costs: net
working capital: and fixed assets +ar directl with sales. The de*t-e2&it ratio and the
di+idend pao&t ratio are constant. .hat is the pro forma net fixed asset +al&e for next ear if
sales are pro,ected to increase * 3./ percent!
". 116:500
#. 1(1:030
C. 1(-:000
%. 1(4:(40
'. 1(0:510

06. "ss&me that Fake <tone: )nc. is operating at 55 percent of capacit. "ll costs and net
working capital +ar directl with sales. .hat is the amo&nt of the pro forma net fixed assets
for next ear if sales are pro,ected to increase * 1- percent!
". 116:000
#. 1(0:400
C. 1(1:/00
%. 1(1:003
'. 1((:145

30. "ss&me that Fake <tone: )nc. is operating at f&ll capacit. "lso ass&me that assets: costs:
and c&rrent lia*ilities +ar directl with sales. The di+idend pao&t ratio is constant. .hat is
the external financing need if sales increase * 1( percent!
". -1-15.06
#. -1(05.46
C. 110-.1-
%. 1-/0.40
'. 1400./0

4-(1
31. Fake <tone: )nc. is pro,ecting sales to decrease * 4 percent next ear while the profit
margin remains constant. The firm wants to increase the di+idend pao&t ratio * ( percent.
.hat is the pro,ected increase in retained earnings for next ear!
". 11:311.1/
#. 11:565.03
C. 11:64-.0/
%. 11:606.6(
'. 1(:10/.0-

3(. .hat is the internal growth rate of Fake <tone: )nc. ass&ming the pao&t ratio remains
constant!
". /.(0 percent
#. /.// percent
C. 3.-0 percent
%. 3.46 percent
'. 5.33 percent

3-. .hat are the pro forma retained earnings for next ear if Fake <tone: )nc. grows at a rate
of (./ percent and *oth the profit margin and the di+idend pao&t ratio remain constant!
". 14:640.60
#. 1/:0(-.10
C. 1/:/6(.(0
%. 1/:6(0.03
'. 10:(6-.-0

34. "ss&me that net working capital and all of the costs of Fake <tone: )nc. increase directl
with sales. "lso ass&me that the tax rate and the di+idend pao&t ratio are constant. The firm
is c&rrentl operating at f&ll capacit. .hat is the external financing need if sales increase *
4 percent!
". -11:(14.45
#. -1504.1/
C. -1-63.16
%. 1(01.10
'. 1/(/.-5
4-((

3/. 8&ngr 8owie;s is c&rrentl operating at 35 percent of capacit. .hat is the f&ll-capacit
le+el of sales!
". 1(1:100.00
#. 1(1:/50.0(
C. 1((:136.46
%. 1(4:/00.13
'. 1(/:-01.61

4-(-
30. 8&ngr 8owie;s is c&rrentl operating at 5( percent of capacit. .hat is the total asset
t&rno+er ratio at f&ll capacit!
". .05
#. .35
C. .6/
%. 1.(6
'. 1.40

33. 8&ngr 8owie;s is c&rrentl operating at 60 percent of capacit. The profit margin and the
di+idend pao&t ratio are pro,ected to remain constant. <ales are pro,ected to increase * -
percent next ear. .hat is the pro,ected addition to retained earnings for next ear!
". 11:-06.16
#. 11:4(1.40
C. 11:554.60
%. 1(:003.35
'. 1-:001.40

35. 8&ngr 8owie;s is c&rrentl operating at f&ll capacit. The profit margin and the di+idend
pao&t ratio are held constant. =et working capital and fixed assets +ar directl with sales.
<ales are pro,ected to increase * 11 percent. .hat is the external financing needed!
". -1160./0
#. -1145.00
C. -163.(0
%. -114./0
'. 1(0.50

36. 8&ngr 8owie;s maintains a constant pao&t ratio. The firm is c&rrentl operating at f&ll
capacit. .hat is the maxim&m rate at which the firm can grow witho&t ac2&iring an
additional external financing!
". 6.34 percent
#. 10./( percent
C. 11.00 percent
%. 11./5 percent
'. 1(.(- percent

4-(4
50. 8&ngr 8owie;s is c&rrentl operating at 64 percent of capacit. .hat is the re2&ired
increase in fixed assets if sales are pro,ected to increase * 14 percent!
". 10
#. 1/11
C. 10--
%. 1305
'. 1333

Essay Questions

51. .h do financial managers need to &nderstand the implications of *oth the internal and
the s&staina*le rates of growth!

5(. )dentif the fo&r primar determinants of a firm;s growth and explain how each factor
co&ld either add to or limit the growth potential of a firm.

5-. "B .hat are the ass&mptions that &nderlie the internal growth rate and #B what are the
implications of this rate!

4-(/
54. =elson;s Landscaping <er+ices ,&st completed a pro forma statement &sing the percentage
of sales approach. The pro forma has a pro,ected external financing need of -1/:/00. .hat are
the firm;s options in this case!

5/. <mith C %a&ghters is getting read to compile pro forma statements for the next few
ears. 8ow can the managers esta*lish a reasona*le range of growth rates that the sho&ld
consider d&ring this planning process!


50. The most recent financial statements for .atchtower: )nc. are shown here Aass&ming no
income taxesB4

"ssets and costs are proportional to sales. %e*t and e2&it are not. =o di+idends are paid.
=ext ear;s sales are pro,ected to *e 1/:00(. .hat is the amo&nt of the external financing
need!
". 1163
#. 1(0-
C. 1(11
%. 1(15
'. 1((-

4-(0
53. The most recent financial statements for Last in Line: )nc. are shown here4

"ssets and costs are proportional to sales. %e*t and e2&it are not. " di+idend of 166( was
paid: and the compan wishes to maintain a constant pao&t ratio. =ext ear;s sales are
pro,ected to *e 1(1:5-0. .hat is the amo&nt of the external financing need!
". 11(:311
#. 11-:---
C. 11-://0
%. 11-:506
'. 114:-/3

55. The most recent financial statements for 3 <eas: )nc. are shown here4

"ssets: costs: and c&rrent lia*ilities are proportional to sales. Long-term de*t and e2&it are
not. The compan maintains a constant /0 percent di+idend pao&t ratio. Like e+er other
firm in its ind&str: next ear;s sales are pro,ected to increase * exactl 10 percent. .hat is
the external financing need!
". 11:(41.30
#. 11:411.10
C. 11:/5-.06
%. 1(:(11.53
'. 1(:-46.65

4-(3
56. The most recent financial statements for #enatar Co. are shown here4

"ssets and costs are proportional to sales. %e*t and e2&it are not. The compan maintains a
constant 40 percent di+idend pao&t ratio. =o external e2&it financing is possi*le. .hat is
". (.61 percent
#. -.44 percent
C. -.53 percent
%. 4.0( percent
'. 4.14 percent

60. The most recent financial statements for 8eng Co. are shown here4

"ssets and costs are proportional to sales. The compan maintains a constant 40 percent
di+idend pao&t ratio and a constant de*t-e2&it ratio. .hat is the maxim&m increase in sales
that can *e s&stained next ear ass&ming no new e2&it is iss&ed!
". 14:505.1(
#. 1/:(11.13
C. 1/:653.45
%. 10:46-.34
'. 10:000.03

4-(5
61. Consider the income statement for 8eir Dordan Corporation4

" (( percent growth rate in sales is pro,ected. .hat is the pro forma addition to retained
earnings ass&ming all costs +ar proportionatel with sales!
". 10:(66
#. 13:-0-
C. 13:560
%. 15:011
'. 15:104

6(. The <occer <hoppe has a 3 percent ret&rn on assets and a (/ percent pao&t ratio. .hat is
its internal growth rate!
". -.3( percent
#. 4.05 percent
C. 4.46 percent
%. /.(- percent
'. /./4 percent

6-. The Parodies Corp. has a (( percent ret&rn on e2&it and a (- percent pao&t ratio. .hat
is its s&staina*le growth rate!
". 15.05 percent
#. 16.(/ percent
C. 16.46 percent
%. (0.-6 percent
'. ((.00 percent

4-(6
64. Consider the following information for Eale*;s Eick*oxing4

.hat is the s&staina*le rate of growth!
". 1-.53 percent
#. 14.(6 percent
C. 14.0/ percent
%. 1/.4( percent
'. 1/./5 percent

6/. .hat is the s&staina*le growth rate ass&ming the following ratios are constant!

". 10.-0 percent
#. 10./- percent
C. 10.03 percent
%. 10.56 percent
'. 11.01 percent

60. <eaweed ?fg.: )nc. is c&rrentl operating at onl 51 percent of fixed asset capacit.
C&rrent sales are 1//0:000. .hat is the maxim&m rate at which sales can grow *efore an
new fixed assets are needed!
". 14.(- percent
#. 14.43 percent
C. 1/.0- percent
%. ((.53 percent
'. (-.40 percent

4--0
63. <eaweed ?fg.: )nc. is c&rrentl operating at onl 50 percent of fixed asset capacit. Fixed
assets are 1-53:000. C&rrent sales are 1/10:000 and are pro,ected to grow to 1004:000. .hat
amo&nt m&st *e spent on new fixed assets to s&pport this growth in sales!
". 10
#. 1((:0/4
C. 140:-16
%. 136:405
'. 16-:005

65. Fixed "ppliance Co. wishes to maintain a growth rate of 5 percent a ear: a constant de*t-
e2&it ratio of 0.-4: and a di+idend pao&t ratio of /( percent. The ratio of total assets to sales
is constant at 1.-. .hat profit margin m&st the firm achie+e!
". 1-.6( percent
#. 14.40 percent
C. 14.63 percent
%. 1/.-- percent
'. 1/.34 percent

66. " firm wishes to maintain a growth rate of 5 percent and a di+idend pao&t ratio of 0(
percent. The ratio of total assets to sales is constant at 1: and the profit margin is 10 percent.
.hat m&st the de*t-e2&it ratio *e if the firm wishes to keep that ratio constant!
". 0.0/
#. 0.40
C. 0.//
%. 0.00
'. 0.6/

100. " firm wishes to maintain an internal growth rate of 11 percent and a di+idend pao&t
ratio of (4 percent. The c&rrent profit margin is 10 percent and the firm &ses no external
financing so&rces. .hat m&st the total asset t&rno+er rate *e!
". 0.53 times
#. 0.60 times
C. 1.01 times
%. 1.1/ times
'. 1.-0 times

4--1
101. #ased on the following information: what is the s&staina*le growth rate of 8endrix
G&itars: )nc.!

". 3.05 percent
#. 6./( percent
C. 11.1( percent
%. 1-.46 percent
'. 14.41 percent

10(. Co&ntr Comfort: )nc. had e2&it of 11/0:000 at the *eginning of the ear. "t the end of
the ear: the compan had total assets of 116/:000. %&ring the ear: the compan sold no new
e2&it. =et income for the ear was 13(:000 and di+idends were 144:040. .hat is the
s&staina*le growth rate!
". 1/.-( percent
#. 1/.36 percent
C. 13.35 percent
%. 15.01 percent
'. 15.(4 percent

4--(
10-. The most recent financial statements for ?oose To&rs: )nc. follow. <ales for (006 are
pro,ected to grow * 10 percent. )nterest expense will remain constantF the tax rate and
di+idend pao&t rate will also remain constant. Costs: other expenses: c&rrent assets: and
acco&nts paa*le increase spontaneo&sl will sales. )f the firm is operating at f&ll capacit and
no new de*t or e2&it is iss&ed: how m&ch external financing is needed to s&pport the 10
percent growth rate in sales!

". 1-10:(40
#. -15:1((
C. -10:305
%. 1(:403
'. 1-:-06

4---
Chapter 04 Long-Term Financial Planning and Growth "nswer Ee


1. Phil is working on a financial plan for the next three ears. This time period is referred to as
which one of the following!
". financial range
! planning hori$on
C. planning agenda
%. short-r&n
'. c&rrent financing period
>efer to section 4.1

AACSB: N/A
Difficulty: Basic
Learning Objective: 4-1
Section: 41
!o"ic: #lanning $ori%on

(. "tlas )nd&stries com*ines the smaller in+estment proposals from each operational &nit into
a single pro,ect for planning p&rposes. This process is referred to as which one of the
following!
". con,oining
! aggregation
C. conglomeration
%. appropriation
'. s&mmation

AACSB: N/A
Difficulty: Basic
Section: 41
!o"ic: Aggregation

4--4
-. .hich one of the following terms is applied to the financial planning method which &ses
the pro,ected sales le+el as the *asis for determining changes in *alance sheet and income
statement acco&nt +al&es!
"! percentage of sales method
#. sales dil&tion method
C. sales reconciliation method
%. common-si$e method
'. trend method
>efer to section 4.-

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: #ercentage of sales a""roac$

4. .hich one of the following terms is defined as di+idends paid expressed as a percentage of
net income!
". di+idend retention ratio
#. di+idend ield
C! di+idend pao&t ratio
%. di+idend portion
'. di+idend section

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: Divi'en' "ayout ratio

4--/
/. .hich one of the following correctl defines the retention ratio!
". one pl&s the di+idend pao&t ratio
! addition to retained earnings di+ided * net income
C. addition to retained earnings di+ided * di+idends paid
%. net income min&s additions to retained earnings
'. net income min&s cash di+idends

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: (etention ratio

0. .hich one of the following ratios identifies the amo&nt of assets a firm needs in order to
generate 11 in sales!
". c&rrent ratio
#. e2&it m&ltiplier
C. retention ratio
#! capital intensit ratio
'. pao&t ratio

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: Ca"ital intensity ratio

4--0
3. The internal growth rate of a firm is *est descri*ed as the4
C! maxim&m growth rate achie+a*le excl&ding external financing of an kind.

AACSB: N/A
Difficulty: Basic
Learning Objective: 4-&
Section: 44
!o"ic: )nternal gro*t$ rate

5. The s&staina*le growth rate of a firm is *est descri*ed as the4
#! maxim&m growth rate achie+a*le excl&ding an external e2&it financing while

AACSB: N/A
Difficulty: Basic
Section: 44
!o"ic: Sustainable gro*t$ rate

4--3
6. 7o& are de+eloping a financial plan for a corporation. .hich of the following 2&estions
will *e considered as o& de+elop this plan!
). 8ow m&ch net working capital will *e needed!
)). .ill additional fixed assets *e re2&ired!
))). .ill di+idends *e paid to shareholders!
)9. 8ow m&ch new de*t m&st *e o*tained!
". ) and )9 onl
#. )) and ))) onl
C. ): ))): and )9 onl
%. )): ))): and )9 onl
E! ): )): ))): and )9
>efer to the introd&ction to chapter 4

AACSB: N/A
Difficulty: Basic
Section: )ntro'uction to c$a"ter 4
!o"ic: +inancial "lanning

10. Financial planning4
". foc&ses solel on the short-term o&tlook for a firm.
#. is a process that firms emplo onl when ma,or changes to a firm;s operations are
anticipated.
C. is a process that firms &ndergo once e+er fi+e ears.
#! considers m&ltiple options and scenarios for the next two to fi+e ears.
'. pro+ides minimal *enefits for firms that are highl responsi+e to economic changes.

AACSB: N/A
Difficulty: Basic
Section: 41

4--5
11. Financial planning accomplishes which of the following for a firm!
). determination of asset re2&irements
)). de+elopment of plans to contend with &nexpected e+ents
))). esta*lishment of priorities
)9. analsis of f&nding options
". ) and ))) onl
#. )) and )9 onl
C. ): ))): and )9 onl
%. ): )): and ))) onl
E! ): )): ))): and )9

AACSB: N/A
Difficulty: Basic
Section: 41

1(. .hich of the following 2&estions are appropriate to address d&ring the financial planning
process!
). <ho&ld the firm merge with a competitor!
)). <ho&ld additional shares of stock *e sold!
))). <ho&ld a partic&lar di+ision *e sold!
)9. <ho&ld a new prod&ct *e introd&ced!
". ): )): and ))) onl
#. ): )): and )9 onl
C. ): ))): and )9 onl
%. )): ))): and )9 onl
E! ): )): ))): and )9

AACSB: N/A
Difficulty: Basic
Section: 41

4--6
1-. .hich one of the following statements concerning financial planning for a firm is
correct!
". Financial planning for fixed assets is done on a segregated *asis within each di+ision.
! Financial plans often contain alternati+e options *ased on economic de+elopments.
C. Financial plans fre2&entl contain conflicting goals.
%. Financial plans ass&me that firms o*tain no additional external financing.
'. The financial planning process is *ased on a single set of economic ass&mptions.

AACSB: N/A
Difficulty: Basic
Section: 41

14. 7o& are getting read to prepare pro forma statements for o&r *&siness. .hich one of the
following are o& most apt to estimate first as o& *egin this process!
". fixed assets
#. c&rrent expenses
C! sales forecast
%. pro,ected net income
'. external financing need

AACSB: N/A
Difficulty: Basic
Section: 41
!o"ic: #ro for,a state,ent

4-40
1/. .hich one of the following statements is correct!
". Pro forma statements m&st ass&me that no new e2&it is iss&ed.
! Pro forma statements are pro,ections: not g&arantees.
C. Pro forma statements are limited to a *alance sheet and income statement.
%. Pro forma financial statements m&st ass&me that no di+idends will *e paid.
'. =et working capital needs are excl&ded from pro forma comp&tations.
>efer to section 4.(

AACSB: N/A
Difficulty: Basic
Section: 4-
!o"ic: #ro for,a state,ents

10. .hen &tili$ing the percentage of sales approach: managers4
). estimate compan sales *ased on a desired le+el of net income and the c&rrent profit
margin.
)). consider onl those assets that +ar directl with sales.
))). consider the c&rrent prod&ction capacit le+el.
)9. can pro,ect *oth net income and net cash flows.
". ) and )) onl
#. )) and ))) onl
C! ))) and )9 onl
%. ): ))): and )9 onl
'. )): ))): and )9 onl

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: #ercentage of sales a""roac$

4-41
13. .hich one of the following is correct in relation to pro forma statements!
". Fixed assets m&st increase if sales are pro,ected to increase.
#. =et working capital is affected onl when a firm;s sales are expected to exceed the firm;s
c&rrent prod&ction capacit.
C. The addition to retained earnings is e2&al to net income pl&s di+idends paid.
%. Long-term de*t +aries directl with sales when a firm is c&rrentl operating at maxim&m
capacit.
E! )n+entor changes are directl proportional to sales changes.

AACSB: N/A
Difficulty: Basic
Section: 4&

15. .hen constr&cting a pro forma statement: net working capital generall4
". remains fixed.
#. +aries onl if the firm is c&rrentl prod&cing at f&ll capacit.
C. +aries onl if the firm maintains a fixed de*t-e2&it ratio.
%. +aries onl if the firm is prod&cing at less than f&ll capacit.
E! +aries proportionall with sales.

AACSB: N/A
Difficulty: Basic
Section: 4&

4-4(
16. " pro forma statement indicates that *oth sales and fixed assets are pro,ected to increase
* 3 percent o+er their c&rrent le+els. Gi+en this: o& can safel ass&me that the firm4
". is pro,ected to grow at the internal rate of growth.
#. is pro,ected to grow at the s&staina*le rate of growth.
C. c&rrentl has excess capacit.
#! is c&rrentl operating at f&ll capacit.
'. retains all of its net income.

AACSB: N/A
Difficulty: Basic
Section: 4&

(0. " firm is c&rrentl operating at f&ll capacit. =et working capital: costs: and all assets
+ar directl with sales. The firm does not wish to o*tain an additional e2&it financing. The
di+idend pao&t ratio is constant at 40 percent. )f the firm has a positi+e external financing
need: that need will *e met *4
". acco&nts paa*le.
! long-term de*t.
C. fixed assets.
%. retained earnings.
'. common stock.

AACSB: N/A
Difficulty: Basic
Learning Objective: 4--
Section: 4&
!o"ic: ./ternal financing nee'

4-4-
(1. .hich one of the following policies most directl affects the pro,ection of the retained
earnings *alance to *e &sed on a pro forma statement!
". net working capital polic
#. capital str&ct&re polic
C! di+idend polic
%. capital *&dgeting polic
'. capacit &tili$ation polic

AACSB: N/A
Difficulty: Basic
Section: 4&

((. 7o& are comparing the c&rrent income statement of a firm to the pro forma income
statement for next ear. The pro forma is *ased on a fo&r percent increase in sales. The firm is
c&rrentl operating at 5/ percent of capacit. =et working capital and all costs +ar directl
with sales. The tax rate and the di+idend pao&t ratio are fixed. Gi+en this information: which
one of the following statements m&st *e tr&e!
". The pro,ected net income is e2&al to the c&rrent ear;s net income.
#. The tax rate will increase at the same rate as sales.
C. >etained earnings will increase * fo&r percent o+er its c&rrent le+el.
#! Total assets will increase * less than fo&r percent.
'. Total lia*ilities and owners; e2&it will increase * fo&r percent.

AACSB: N/A
Difficulty: )nter,e'iate
Section: 4&

4-44
(-. " firm is operating at 60 percent of capacit. This information is primaril needed to
pro,ect which one of the following acco&nt +al&es when compiling pro forma statements!
". sales
#. costs of goods sold
C. acco&nts recei+a*le
#! fixed assets
'. long-term de*t

AACSB: N/A
Difficulty: Basic
Section: 4&

(4. .hich one of the following capital intensit ratios indicates the largest need for fixed
assets per dollar of sales!
". 0.30
#. 0.50
C. 1.00
%. 1.00
E! 1.1/

AACSB: N/A
Difficulty: Basic
Section: 4&

4-4/
(/. .hich of the following are needed to determine the amo&nt of fixed assets re2&ired to
s&pport each dollar of sales!
). c&rrent amo&nt of fixed assets
)). c&rrent sales
))). c&rrent le+el of operating capacit
)9. pro,ected growth rate of sales
". ) and ))) onl
#. )) and )9 onl
C! ): )): and ))) onl
%. )): ))): and )9 onl
'. ): )): ))): and )9

AACSB: N/A
Section: 4&

(0. The plow*ack ratio is4
". e2&al to net income di+ided * the change in total e2&it.
! the percentage of net income a+aila*le to the firm to f&nd f&t&re growth.
C. e2&al to one min&s the retention ratio.
%. the change in retained earnings di+ided * the di+idends paid.
'. the dollar increase in net income di+ided * the dollar increase in sales.

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: #lo*bac0 ratio

4-40
(3. " firm;s net working capital and all of its expenses +ar directl with sales. The firm is
operating c&rrentl at 60 percent of capacit. The firm wants no additional external financing
of an kind. .hich one of the following statements related to the firm;s pro forma statements
for next ear m&st *e correct!
". Total lia*ilities will remain constant at this ear;s +al&e.
#. The maxim&m rate of sales increase is 4 percent.
C! The firm cannot exceed its internal rate of growth.
%. The pro,ected owners; e2&it will e2&al this ear;s ending e2&it *alance.
'. Fixed assets m&st remain constant at the c&rrent le+el.

AACSB: N/A
Section: 44
!o"ic: )nternal rate of gro*t$

(5. .hich one of the following will increase the maxim&m rate of growth a corporation can
achie+e!
". a+oidance of external e2&it financing
#. increase in corporate tax rates
C. red&ction in the retention ratio
#! decrease in the di+idend pao&t ratio
'. decrease in sales gi+en a positi+e profit margin

AACSB: N/A
Section: 44
!o"ic: 1ro*t$ rates

4-43
(6. ?artin "erospace is c&rrentl operating at f&ll capacit *ased on its c&rrent le+el of assets.
<ales are expected to increase * 4./ percent next ear: which is the firm;s internal rate of
growth. =et working capital and operating costs are expected to increase directl with sales.
The interest expense will remain constant at its c&rrent le+el. The tax rate and the di+idend
pao&t ratio will *e held constant. C&rrent and pro,ected net income is positi+e. .hich one of
the following statements is correct regarding the pro forma statement for next ear!
". The pro forma profit margin is e2&al to the c&rrent profit margin.
#. >etained earnings will increase at the same rate as sales.
C! Total assets will increase at the same rate as sales.
%. Long-term de*t will increase in direct relation to sales.
'. @wners; e2&it will remain constant.

AACSB: N/A
Section: 4&

-0. " firm;s external financing need is financed * which of the following!
". retained earnings
#. net working capital and retained earnings
C. net income and retained earnings
#! de*t or e2&it
'. owners; e2&it: incl&ding retained earnings

AACSB: N/A
Difficulty: Basic
Section: 4&

4-45
-1. <ales can often increase witho&t increasing which one of the following!
". acco&nts recei+a*le
#. cost of goods sold
C. acco&nts paa*le
#! fixed assets
'. in+entor

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: Ca"acity level

-(. #lasco )nd&stries is c&rrentl at f&ll-capacit sales. .hich one of the following is limiting
sales to this le+el!
". net working capital
#. long-term de*t
C. in+entor
#! fixed assets
'. de*t-e2&it ratio

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: +ull ca"acity sales

4-46
--. "ll else constant: which one of the following will increase the internal rate of growth!
". decrease in the retention ratio
#. decrease in net income
C. increase in the di+idend pao&t ratio
#! decrease in total assets
'. increase in costs of goods sold

AACSB: N/A
Section: 44
!o"ic: )nternal rate of gro*t$

-4. The external financing need4
"! will limit growth if &nf&nded.
#. is &naffected * the di+idend pao&t ratio.
C. m&st *e f&nded * long-term de*t.
%. ignores an changes in retained earnings.
'. considers onl the re2&ired increase in fixed assets.

AACSB: N/A
Difficulty: Basic
Section: 4&

4-/0
-/. .hich one of the following will ca&se the s&staina*le growth rate to e2&al to internal
growth rate!
". di+idend pao&t ratio greater than 1.0
#. de*t-e2&it ratio of 1.0
C. retention ratio *etween 0.0 and 1.0
#! e2&it m&ltiplier of 1.0
'. $ero di+idend paments

AACSB: N/A
Section: 44
!o"ic: 1ro*t$ rates

-0. The s&staina*le growth rate4
". ass&mes there is no external financing of an kind.
#. ass&mes no additional long-term de*t is a+aila*le.
C! ass&mes the de*t-e2&it ratio is constant.
%. ass&mes the de*t-e2&it ratio is 1.0.
'. ass&mes all income is retained * the firm.

AACSB: N/A
Difficulty: Basic
Section: 44

4-/1
-3. )f a firm e2&ates its pro forma sales growth to the rate of s&staina*le growth: and has
positi+e net income and excess capacit: then the4
". maxim&m capacit le+el will ha+e to increase at the same rate as sales growth.
#. total assets will ha+e to increase at the same rate as sales growth.
C. de*t-e2&it ratio will increase.
#! retained earnings will increase.
'. n&m*er of common shares o&tstanding will increase.

AACSB: N/A
Section: 44
!o"ic: Sustainable gro*t$

-5. <al;s Pi$$a has a di+idend pao&t ratio of 10 percent. The firm does not want to iss&e
additional e2&it shares *&t does want to maintain its c&rrent de*t-e2&it ratio and its c&rrent
di+idend polic. The firm is profita*le. .hich one of the following defines the maxim&m rate
at which this firm can grow!
". internal growth rate A1 - 0.10B
#. s&staina*le growth rate A1 - 0.10B
C. internal growth rate
#! s&staina*le growth rate
'. $ero percent

AACSB: N/A
Difficulty: Basic
Section: 44

4-/(
-6. .hich of the following can affect a firm;s s&staina*le rate of growth!
). capital intensit ratio
)). profit margin
))). di+idend polic
)9. de*t-e2&it ratio
". ))) onl
#. ) and ))) onl
C. )): ))): and )9 onl
%. ): )): and )9 onl
E! ): )): ))): and )9

AACSB: N/A
Section: 44

40. Financial plans generall tend to ignore which one of the following!
". di+idend polic
#. manager;s goals and o*,ecti+es
C! risks associated with cash flows
%. operating capacit le+els
'. capital str&ct&re polic
>efer to section 4./

AACSB: N/A
Difficulty: Basic
Section: 42
!o"ic: +inancial "lans

4-/-
41. The financial planning process tends to place the least emphasis on which one of the
following!
". growth limitations
#. capacit &tili$ation
C! market +al&e of a firm
%. capital str&ct&re of a firm
'. di+idend polic

AACSB: N/A
Difficulty: Basic
Section: 42

4(. The financial planning process4
). in+ol+es internal negotiations among di+isions.
)). 2&antifies senior manager;s goals.
))). considers onl internal factors.
)9. reconciles compan acti+ities across di+isions.
". ))) and )9 onl
#. )) and ))) onl
C! ): )): and )9 onl
%. )): ))): and )9 onl
'. ): )): ))): and )9

AACSB: N/A
Section: 42
!o"ic: +inancial "lanning "rocess

4-/4
4-. " Procr&stes approach to financial planning is *ased on4
". a polic of prod&cing a financial plan once e+er fi+e ears.
! de+eloping a plan aro&nd the goals of senior managers.
C. a proacti+e approach to the economic o&tlook.
%. a flexi*le capital *&dget.
'. a flexi*le capital str&ct&re.

AACSB: N/A
Difficulty: Basic
Section: 42
!o"ic: #rocrustes a""roac$

44. Fresno <alads has c&rrent sales of 14:600 and a profit margin of 0./ percent. The firm
estimates that sales will increase * / percent next ear and that all costs will +ar in direct
relationship to sales. .hat is the pro forma net income!
". 1-0-.--
#. 1-(3.15
C! 1--4.4-
%. 1--5.30
'. 1-41.10
=et income G 14:600 .00/ A1 H .0/B G 1--4.4-

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: #ro for,a inco,e

4-//
4/. .agner )nd&strial ?otors: which is c&rrentl operating at f&ll capacit: has sales of
1(6:000: c&rrent assets of 11:000: c&rrent lia*ilities of 11:(00: net fixed assets of 1(3:/00: and
a / percent profit margin. The firm has no long-term de*t and does not plan on ac2&iring an.
The firm does not pa an di+idends. <ales are expected to increase * 4./ percent next ear.
)f all assets: short-term lia*ilities: and costs +ar directl with sales: how m&ch additional
e2&it financing is re2&ired for next ear!
"! -1(/6.3/
#. -1(01.16
C. 1603.-0
%. 11:066.05
'. 11:/1/.(/
Pro,ected assets G A11:000 H 1(3:/00B 1.04/ G 1-0:406./0
Pro,ected lia*ilities G 11:(00 1.04/ G 11:(/4
C&rrent e2&it G 11:000 H 1(3:/00 - 11:(00 G 1(3:600
Pro,ected increase in retained earnings G 1(6:000 .0/ 1.04/ G 11:/1/.(/
'2&it f&nding need G 1-0:406./0 - 11:(/4 - 1(3:600 - 11:/1/.(/ G -1(/6.3/

AACSB: Analytic
Difficulty: Basic
Section: 4-
!o"ic: .3uity financing

40. The Cookie <hoppe expects sales of 14-3:/00 next ear. The profit margin is 4.5 percent
and the firm has a -0 percent di+idend pao&t ratio. .hat is the pro,ected increase in retained
earnings!
"! 114:300
#. 113:/00
C. 115:-00
%. 1(0:000
'. 1(1:000
Change in retained earnings G 14-3:/00 .045 A1 - 0.-0B G 114:300

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: (etaine' earnings

4-/0
43. Gladsden >efinishers c&rrentl has 1(1:600 in sales and is operating at 4/ percent of the
firm;s capacit. .hat is the f&ll capacit le+el of sales!
". 1-1:3//
#. 1-0:(/0
C! 145:003
%. 1/1:---
'. 1/4:/00
F&ll-capacit sales G 1(1:600I0.4/ G 145:003

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: +ull ca"acity sales

45. The Corner <tore has 1(16:000 of sales and 1153:000 of total assets. The firm is operating
at 53 percent of capacit. .hat is the capital intensit ratio at f&ll capacit!
". 0.0(
#. 0.05
C! 0.34
%. 1.-/
'. 1.43
F&ll-capacit sales G 1(16:000I0.53 G 1(/1:3(4.14
Capital intensit ratio G 1153:000I1(/1:3(4.14 G 0.34

AACSB: Analytic
Difficulty: Basic
Section: 4&

4-/3
46. ?iller #ros. 8ardware is operating at f&ll capacit with a sales le+el of 1056:300 and
fixed assets of 1405:000. The profit margin is 3 percent. .hat is the re2&ired addition to fixed
assets if sales are to increase * 10 percent!
". 1-:(30
#. 14:050
C. 1(5:400
%. 1-(:300
E! 140:500
>e2&ired addition to fixed assets G 1405:000 0.10 G 140:500
@r: Capital intensit ratio G 1405:000I1056:300 G 0.035//0
>e2&ired addition to fixed assets G 1056:300 0.10 0.035//0 G 140:500

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: +i/e' assets

/0. %esigner;s @&tlet has a capital intensit ratio of 0.53 at f&ll capacit. C&rrentl: total assets
are 145:600 and c&rrent sales are 1/(:-00. "t what le+el of capacit is the firm c&rrentl
operating!
". 56 percent
#. 61 percent
C! 6- percent
%. 60 percent
'. 65 percent
Total capacit sales G 145:600I0.53 G 1/0:(00.60
C&rrent capacit &tili$ation G 1/(:-00I1/0:(00.60 G 6- percent

AACSB: Analytic
Section: 4&
!o"ic: Ca"acity level

4-/5
/1. ?onika;s %inor is operating at 64 percent of its fixed asset capacit and has c&rrent sales
of 1011:000. 8ow m&ch can the firm grow *efore an new fixed assets are needed!
". 4.66 percent
#. /.35 percent
C. 0.0( percent
#! 0.-5 percent
'. 0.36 percent
F&ll-capacit sales G 1011:000I0.64 G 10/0:000
?axim&m growth witho&t additional assets G A10/0:000I1011:000B - 1 G 0.-5 percent

AACSB: Analytic
Section: 4&
!o"ic: Ca"acity an' gro*t$

/(. <top and Go has a 4./ percent profit margin and a 1/ percent di+idend pao&t ratio. The
total asset t&rno+er is 1.0 and the de*t-e2&it ratio is 0.00. .hat is the s&staina*le rate of
growth!
". 6.1- percent
#. 6./4 percent
C. 6.56 percent
%. 10.(0 percent
E! 10.5/ percent
>et&rn on e2&it G 0.04/ 1.00 A1 H 0.00B G 0.11/(
<&staina*le growth G J0.11/( A1 - 0.1/BKIL1 - J.11/( A1 - 0.1/BKM G 10.5/ percent

AACSB: Analytic
Difficulty: Basic
Section: 44
!o"ic: Sustainable gro*t$

4-/6
/-. >. =. C.: )nc. desires a s&staina*le growth rate of 4./ percent while maintaining a 40
percent di+idend pao&t ratio and a 0 percent profit margin. The compan has a capital
intensit ratio of 1.(-. .hat e2&it m&ltiplier is re2&ired to achie+e the compan;s desired
rate of growth!
". 1.--
#. 1.-5
C. 1.4(
#! 1.43
'. 1./-
0.04/ G J>@' A1 - 0.40BKIL1 - J>@' A1 - 0.40BKMF >@' G .03133
0.03133 G 0.00 A1I1.(-B '?F '? G 1.43

AACSB: Analytic
Section: 44
!o"ic: .3uity ,ulti"lier

/4. " firm has a retention ratio of 4/ percent and a s&staina*le growth rate of 0.( percent. The
capital intensit ratio is 1.( and the de*t-e2&it ratio is 0.04. .hat is the profit margin!
". 0.(5 percent
#. 3.03 percent
C. 6.43 percent
%. 1(.-5 percent
E! 14.0- percent
0.00( G J>@' 0.4/KIJ1 - A>@' 0.4/BKF >@' G .1(63-4
0.1(63-4 G P? A1I1.(B A1 H .004BF P? G 14.0- percent

AACSB: Analytic
Section: 44
!o"ic: #rofit ,argin

4-00
//. Frasier Ca*inets wants to maintain a growth rate of / percent witho&t inc&rring an
additional e2&it financing. The firm maintains a constant de*t-e2&it ratio of .0.//: a total
asset t&rno+er ratio of 1.-0: and a profit margin of 6.0 percent. .hat m&st the di+idend pao&t
ratio *e!
". (0.(0 percent
#. -5.53 percent
C. 46.(6 percent
%. 01.1- percent
E! 3-.34 percent
>et&rn on e2&it G 0.06 1.-0 A1 H 0.//B G 0.151-/
<&staina*le growth G J0.151-/ *KIJ1 - A0.151-/ *BK G .0/F * G 0.(0(0
Pao&t ratio G 1 - 0.(0(0 G 3-.34 percent

AACSB: Analytic
Section: 44
!o"ic: #ayout ratio

4-01
/0. Cross Town 'xpress has sales of 11-(:000: net income of 11(:000: total assets of 165:000:
and total e2&it of 14/:000. The firm paid 13:/00 in di+idends and maintains a constant
di+idend pao&t ratio. C&rrentl: the firm is operating at f&ll capacit. "ll costs and assets
+ar directl with sales. The firm does not want to o*tain an additional external e2&it. "t
the s&staina*le rate of growth: how m&ch new total de*t m&st the firm ac2&ire!
". 10
#. 14:-11
C. 1/:656
%. 10:(03
E! 10:05/
%i+idend pao&t ratio G 13:/00I11(:000 G 0.00
>etention ratio G 1 - 0.00 G 0.40
<&staina*le growth G JA11(:000I14/:000B 0.40KIL1 - JA11(:000I14/:000B 0.40KM G
0.1(01(0
Pro,ected total assets G 165:000 1.1(01(0 G 1110:-00.-/
C&rrent de*t G 165:000 - 14/:000 G 1/-:000
Pro,ected e2&it G 14/:000 H A11(:000 1.1(01(0 0.40B G 1/0:03/.05
=et de*t re2&ired G 1110:-00.-/ - 1/-:000 - 1/0:03/.05 G 10:05/

AACSB: Analytic
Section: 44

/3. The Two <isters has a 6 percent ret&rn on assets and a 3/ percent retention ratio. .hat is
". 0./0 percent
#. 0.3/ percent
C. 0.63 percent
#! 3.(4 percent
'. 3.-5 percent
)nternal growth rate G A0.06 0.3/BIJ1 - A0.06 0.3/BK G 3.(4 percent

AACSB: Analytic
Difficulty: Basic
Section: 44

4-0(
/5. The %og 8o&se has net income of 1-:4/0 and total e2&it of 15:000. The de*t-e2&it ratio
is 0.00 and the pao&t ratio is (0 percent. .hat is the internal growth rate!
". 14.43 percent
#. 13.35 percent
C! (/.06 percent
%. (6.40 percent
'. --.-- percent
Total assets G 15:000 A1 H 0.00B G 11-:300
>et&rn on assets G 1-:4/0I11-:300 G .(/03(3
)nternal growth G J.(/03(3 A1 - 0.(0KIJ1 - A.(/03(3 A1 - 0.(0BK G (/.06 percent

AACSB: Analytic
Section: 44

4-0-

/6. .hat is ?a,or ?an&scripts: )nc.;s retention ratio!
". -- percent
#. 40 percent
C. /0 percent
#! 00 percent
'. 03 percent
>etention ratio G A1(:-30 - 16/0BI1(:-30 G 00 percent

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: (etention ratio

4-04
00. ?a,or ?an&scripts: )nc. does not want to inc&r an additional external financing. The
di+idend pao&t ratio is constant. .hat is the firm;s maxim&m rate of growth!
"! 3.44 percent
#. 3.35 percent
C. 6.(0 percent
%. 6.3/ percent
'. 10.60 percent
>etention ratio G A1(:-30 - 16/0BI1(:-30 G 0.00
)nternal growth rate G JA1(:-30I1(0:/60B 0.00KIL1 - JA1(:-30I1(0:/60B 0.00KM G 3.44
percent

AACSB: Analytic
Difficulty: Basic
Section: 44

01. )f ?a,or ?an&scripts: )nc. decides to maintain a constant de*t-e2&it ratio: what rate of
growth can it maintain ass&ming that no additional external e2&it financing is a+aila*le.
". 10.(- percent
#. 10.46 percent
C! 10.60 percent
%. 11.(3 percent
'. 11.0/ percent
>etention ratio G A1(:-30 - 16/0BI1(:-30 G 0.00
<&staina*le growth rate G LJ1(:-30IA110:000 H 14:/10BK 0.00MIAexpression errorB G 10.60
percent

AACSB: Analytic
Difficulty: Basic
Section: 44

4-0/
0(. ?a,or ?an&scripts: )nc. is c&rrentl operating at maxim&m capacit. "ll costs: assets: and
c&rrent lia*ilities +ar directl with sales. The tax rate and the di+idend pao&t ratio will
remain constant. 8ow m&ch additional de*t is re2&ired if no new e2&it is raised and sales are
pro,ected to increase * 5 percent!
"! -11/3
#. -105
C. 1(41
%. 1-45
'. 1-03
Pro,ected total assets G 1(0:/60 1.05 G 1((:(-3
Pro,ected acco&nts paa*le G 1-:-00 1.05 G 1-:/04
C&rrent long-term de*t G 1(:350
C&rrent common stock G 110:000
Pro,ected retained earnings G 14:/10 H JA1(:-30 - 16/0B 1.05K G 10:0/0
"dditional de*t re2&ired G 1((:(-3 - 1-:/04 - 1(:350 - 110:000 - 10:0/0 G -11/3

AACSB: Analytic
Section: 4&

4-00
0-. ?a,or ?an&scripts: )nc. is c&rrentl operating at 5/ percent of capacit. "ll costs and net
working capital +ar directl with sales. The tax rate: the profit margin: and the di+idend
pao&t ratio will remain constant. 8ow m&ch additional de*t is re2&ired if no new e2&it is
raised and sales are pro,ected to increase * 1/ percent!
". -1510
! -13/0
C. -104(
%. 1(44
'. 1-/5
Pro,ected c&rrent assets G 16:160 1.1/ G 110:/05./0
Pro,ected capacit le+el G 0.5/ 1.1/ G 0.633/ A.ill not exceed excess capacit.B
Pro,ected fixed assets G 111:400
Pro,ected acco&nts paa*le G 1-:-00 1.1/ G 1-:36/
C&rrent long-term de*t G 1(:350
C&rrent common stock G 110:000
Pro,ected retained earnings G 14:/10 H JA1(:-30 - 16/0B 1.1/K G 10:146.60
"dditional de*t re2&ired G 110:/05./0 H 111:400 - 1-:36/ - 1(:350 - 110:000 - 10:146.60 G -
13/0

AACSB: Analytic
Section: 4&

04. "ss&me the profit margin and the pao&t ratio of ?a,or ?an&scripts: )nc. are constant. )f
sales increase * 0 percent: what is the pro forma retained earnings!
". 1/:((0.15
#. 1/:3(1.4(
C! 10:0(1./0
%. 10:045.4(
'. 13:0(5./0
Pro forma retained earnings G 14:/10 H JA1(:-30 - 16/0B 1.00BK G 10:0(1./0

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: #ro for,a

4-03
0/. "ss&me that ?a,or ?an&scripts: )nc. is c&rrentl operating at 6/ percent of capacit and
that sales are pro,ected to increase to 1(0:000. .hat is the pro,ected addition to fixed assets!
". 10
! 11:46-
C. 11:/(6
%. 11:/40
'. 11:/55
C&rrent maxim&m capacit G 110:500I.6/ G 113:054.(1
>e2&ired addition to fixed assets G JA111:400I113:054.(1B 1(0:000K - 111:400 G 11:46-

AACSB: Analytic
Section: 4&
!o"ic: +i/e' assets

4-05
00. "ll of Fake <tone;s costs and net working capital +ar directl with sales. <ales are
pro,ected to increase * -./ percent. .hat is the pro forma acco&nts recei+a*le *alance for
next ear!
". 11:0/6.50
#. 11:001.54
C! 11:350.(0
%. 11:353.50
'. 11:500.40
Pro forma acco&nts recei+a*le G 11:3(0 A1 H .0-/B G 11:350.(0

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: #ro for,a

03. The profit margin: the de*t-e2&it ratio: and the di+idend pao&t ratio for Fake <tone: )nc.
are constant. <ales are expected to increase * 11:00( next ear. .hat is the pro,ected
addition to retained earnings for next ear!
". 16(.-4
#. 1155.//
C. 11:606.10
#! 1(:144.-4
'. 1(:-50.05
Pro,ected change in retained earnings G JA1(-:000 H 11:00(BI1(-:000K A1-:4(0 - 11:-05B G
1(:144.-4

AACSB: Analytic
Difficulty: Basic
Section: 4&

4-06
05. "ss&me that Fake <tone: )nc. is operating at f&ll capacit. "lso ass&me that all costs: net
working capital: and fixed assets +ar directl with sales. The de*t-e2&it ratio and the
di+idend pao&t ratio are constant. .hat is the pro forma net fixed asset +al&e for next ear if
sales are pro,ected to increase * 3./ percent!
". 116:500
! 1(1:030
C. 1(-:000
%. 1(4:(40
'. 1(0:510
Pro forma net fixed assets G 116:000 A1 H 0.03/B G 1(1:030

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: #ro for,a

06. "ss&me that Fake <tone: )nc. is operating at 55 percent of capacit. "ll costs and net
working capital +ar directl with sales. .hat is the amo&nt of the pro forma net fixed assets
for next ear if sales are pro,ected to increase * 1- percent!
"! 116:000
#. 1(0:400
C. 1(1:/00
%. 1(1:003
'. 1((:145
Pro forma capacit le+el G 0.55 A1 H 0.1-B G 66.44 percent.
=o additional fixed assets are re2&ired. Th&s: fixed assets will remain at 116:000.

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: +i/e' assets

4-30
30. "ss&me that Fake <tone: )nc. is operating at f&ll capacit. "lso ass&me that assets: costs:
and c&rrent lia*ilities +ar directl with sales. The di+idend pao&t ratio is constant. .hat is
the external financing need if sales increase * 1( percent!
". -1-15.06
#. -1(05.46
C. 110-.1-
%. 1-/0.40
E! 1400./0
'xternal financing needed G A1.1( 1(/:400B - A1.1( 1(:430B - 15:500 - 110:000 - 14:160 -
J1-:4(0 - 11:-05 1.1(K G 1400./0

AACSB: Analytic
Difficulty: Basic
Section: 44

31. Fake <tone: )nc. is pro,ecting sales to decrease * 4 percent next ear while the profit
margin remains constant. The firm wants to increase the di+idend pao&t ratio * ( percent.
.hat is the pro,ected increase in retained earnings for next ear!
". 11:311.1/
#. 11:565.03
C! 11:64-.0/
%. 11:606.6(
'. 1(:10/.0-
Pro,ected di+idend pao&t ratio G A11:-05I1-:4(0B 1.0( G 0.405
>etention ratio G 1 - 0.405 G 0./6(
Pro,ected increase in retained earnings G 1-:4(0 A1 - 0.04B 0./6( G 11:64-.0/

AACSB: Analytic
Difficulty: Basic
Section: 4&

4-31
3(. .hat is the internal growth rate of Fake <tone: )nc. ass&ming the pao&t ratio remains
constant!
". /.(0 percent
#. /.// percent
C. 3.-0 percent
%. 3.46 percent
E! 5.33 percent
)nternal growth G LA1-:4(0I1(/:400B J1 - A11:-05I1-:4(0BKMIAexpression errorB G 5.33
percent

AACSB: Analytic
Difficulty: Basic
Section: 44

3-. .hat are the pro forma retained earnings for next ear if Fake <tone: )nc. grows at a rate
of (./ percent and *oth the profit margin and the di+idend pao&t ratio remain constant!
". 14:640.60
#. 1/:0(-.10
C. 1/:/6(.(0
%. 1/:6(0.03
E! 10:(6-.-0
Pro forma retained earnings G 14:160 H JA1-:4(0 - 11:-05B 1.0(/BK G 10:(6-.-0

AACSB: Analytic
Difficulty: Basic
Section: 44

4-3(
34. "ss&me that net working capital and all of the costs of Fake <tone: )nc. increase directl
with sales. "lso ass&me that the tax rate and the di+idend pao&t ratio are constant. The firm
is c&rrentl operating at f&ll capacit. .hat is the external financing need if sales increase *
4 percent!
"! -11:(14.45
#. -1504.1/
C. -1-63.16
%. 1(01.10
'. 1/(/.-5
Pro,ected total assets G 1(/:400 1.04 G 1(0:435.40
Pro,ected acco&nts paa*le G 1(:430 1.04 G 1(:/05.50
Pro,ected retained earnings G 14:160 H JA1-:4(0 - 11:-05B 1.04K G 10:-(4.05
'xternal financing need G 1(0:435.40 - 1(:/05.50 - 15:500 - 110:000 - 10:-(4.05 G -
11:(14.45

AACSB: Analytic
Difficulty: Basic
Section: 44

4-3-

3/. 8&ngr 8owie;s is c&rrentl operating at 35 percent of capacit. .hat is the f&ll-capacit
le+el of sales!
". 1(1:100.00
#. 1(1:/50.0(
C! 1((:136.46
%. 1(4:/00.13
'. 1(/:-01.61
F&ll-capacit sales G 113:-00I0.35 G 1((:136.46

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: Ca"acity level sales

4-34
30. 8&ngr 8owie;s is c&rrentl operating at 5( percent of capacit. .hat is the total asset
t&rno+er ratio at f&ll capacit!
". .05
#. .35
C. .6/
%. 1.(6
E! 1.40
F&ll-capacit sales G 113:-00I0.5( G 1(1:063./0
Total asset t&rno+er at f&ll-capacit G 1(1:063./0I114:/00 G 1.40

AACSB: Analytic
Section: 4&
!o"ic: !otal asset turnover

33. 8&ngr 8owie;s is c&rrentl operating at 60 percent of capacit. The profit margin and the
di+idend pao&t ratio are pro,ected to remain constant. <ales are pro,ected to increase * -
percent next ear. .hat is the pro,ected addition to retained earnings for next ear!
". 11:-06.16
! 11:4(1.40
C. 11:554.60
%. 1(:003.35
'. 1-:001.40
Pro,ected addition to retained earnings G 11:-50 A1 H .0-B G 11:4(1.40

AACSB: Analytic
Difficulty: Basic
Section: 4&

4-3/
35. 8&ngr 8owie;s is c&rrentl operating at f&ll capacit. The profit margin and the di+idend
pao&t ratio are held constant. =et working capital and fixed assets +ar directl with sales.
<ales are pro,ected to increase * 11 percent. .hat is the external financing needed!
". -1160./0
! -1145.00
C. -163.(0
%. -114./0
'. 1(0.50
Pro,ected total assets G 114:/00 1.11 G 110:06/
Pro,ected acco&nts paa*le G 11:6(0 1.11 G 1(:1-1.(0
Pro,ected retained earnings G 11:/50 H A11:-50 1.11B G 1-:111.50
'xternal financing need G 110:06/ - 1(:1-1.(0 - 1-:/00 - 13:/00 - 1-:111.50 G -1145

AACSB: Analytic
Difficulty: Basic
Section: 44

36. 8&ngr 8owie;s maintains a constant pao&t ratio. The firm is c&rrentl operating at f&ll
capacit. .hat is the maxim&m rate at which the firm can grow witho&t ac2&iring an
additional external financing!
". 6.34 percent
! 10./( percent
C. 11.00 percent
%. 11./5 percent
'. 1(.(- percent
)nternal growth G JA11:5-0I114:/00B A11:-50I11:5-0BKIL1 - JA11:5-0I114:/00B
A11:-50I11:5-0BKM G 10./( percent

AACSB: Analytic
Difficulty: Basic
Section: 44

4-30
50. 8&ngr 8owie;s is c&rrentl operating at 64 percent of capacit. .hat is the re2&ired
increase in fixed assets if sales are pro,ected to increase * 14 percent!
". 10
#. 1/11
C. 10--
%. 1305
E! 1333
F&ll-capacit sales G 113:-00I.64 G 115:404.(0
>e2&ired increase in fixed assets G A110:5/0I115:404.(0B A113:-00 1.14B - 110:5/0 G 1333

AACSB: Analytic
Section: 4&
!o"ic: +i/e' assets

Essay Questions

51. .h do financial managers need to &nderstand the implications of *oth the internal and
the s&staina*le rates of growth!
.orking capital: fixed assets: and external financing m&st coordinate with and *e a*le to
s&pport a firm;s sales growth. )f: for example: a pro,ected increase in sales re2&ires external
financing when no s&ch financing is a+aila*le: then the firm cannot grow at the desired rate.
Nnderstanding the implications of *oth the internal and the s&staina*le growth rates helps
managers &nderstand the need to limit growth so that the firm does not attempt to o&tgrow its
reso&rces.
Feed*ack4 >efer to section 4.4

AACSB: (eflective t$in0ing
Difficulty: Basic
Section: 44
!o"ic: 1ro*t$ li,itations

4-33
5(. )dentif the fo&r primar determinants of a firm;s growth and explain how each factor
co&ld either add to or limit the growth potential of a firm.
The fo&r factors are4


Section: 44
!o"ic: Deter,inants of gro*t$

4-35
5-. "B .hat are the ass&mptions that &nderlie the internal growth rate and #B what are the
implications of this rate!
The *asic ass&mptions are4 Costs and net working capital increase proportionatel with sales.
Fixed assets also increase proportionatel with sales once prod&ction reaches f&ll capacit.
The di+idend pao&t ratio is constant. =o additional external financing of an kind is
permissi*le.
The implication is that firms are limited to a rate of growth e2&al to the internal growth rate so
long as external financing remains limited at its c&rrent le+el. )n other words: the internal
growth rate is the maxim&m rate of growth a firm can achie+e *ased on internall generated
f&nds.

Section: 44

54. =elson;s Landscaping <er+ices ,&st completed a pro forma statement &sing the percentage
of sales approach. The pro forma has a pro,ected external financing need of -1/:/00. .hat are
the firm;s options in this case!
.ith a negati+e external financing need: the firm has a s&rpl&s of f&nds that it can &se to
red&ce c&rrent lia*ilities: red&ce long-term de*t: *& *ack common stock: or increase
di+idends. )f accepta*le opport&nities exist: the firm might also &se the extra f&nds to
p&rchase fixed assets there* increasing its maxim&m capacit le+el: sho&ld that need *e
anticipated.
Feed*ack4 >efer to section 4.-

Section: 4&

4-36
5/. <mith C %a&ghters is getting read to compile pro forma statements for the next few
ears. 8ow can the managers esta*lish a reasona*le range of growth rates that the sho&ld
consider d&ring this planning process!
The internal growth rate esta*lishes the minim&m desired rate of growth while the s&staina*le
growth rate identifies the maxim&m s&pporta*le le+el of growth. These growth rates
effecti+el determine the range of rates than managers sho&ld consider.

Section: 44
!o"ic: 1ro*t$ rates

4-50

50. The most recent financial statements for .atchtower: )nc. are shown here Aass&ming no
income taxesB4

"ssets and costs are proportional to sales. %e*t and e2&it are not. =o di+idends are paid.
=ext ear;s sales are pro,ected to *e 1/:00(. .hat is the amo&nt of the external financing
need!
". 1163
! 1(0-
C. 1(11
%. 1(15
'. 1((-
<ales increase G A1/:00( - 14:100BI14:100 G 0.((
'xternal financing need G 111:114 - 110:611 G 1(0-

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-&
Section: 4&

4-51
53. The most recent financial statements for Last in Line: )nc. are shown here4

"ssets and costs are proportional to sales. %e*t and e2&it are not. " di+idend of 166( was
paid: and the compan wishes to maintain a constant pao&t ratio. =ext ear;s sales are
pro,ected to *e 1(1:5-0. .hat is the amo&nt of the external financing need!
". 11(:311
#. 11-:---
C. 11-://0
%. 11-:506
E! 114:-/3
<ales increase G A1(1:5-0 - 115:/00BI115:/00 G 0.15
'xternal financing need G 110/:0(( - 161:(0/ G 114:-/3

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-4
Section: 4&

4-5(
55. The most recent financial statements for 3 <eas: )nc. are shown here4

"ssets: costs: and c&rrent lia*ilities are proportional to sales. Long-term de*t and e2&it are
not. The compan maintains a constant /0 percent di+idend pao&t ratio. Like e+er other
firm in its ind&str: next ear;s sales are pro,ected to increase * exactl 10 percent. .hat is
the external financing need!
"! 11:(41.30
#. 11:411.10
C. 11:/5-.06
%. 1(:(11.53
'. 1(:-46.65
'xternal financing need G 11-:006.3( - 111:5(3.60 G 11:(41.30

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-2
Section: 4&

4-5-
56. The most recent financial statements for #enatar Co. are shown here4

"ssets and costs are proportional to sales. %e*t and e2&it are not. The compan maintains a
constant 40 percent di+idend pao&t ratio. =o external e2&it financing is possi*le. .hat is
". (.61 percent
#. -.44 percent
C! -.53 percent
%. 4.0( percent
'. 4.14 percent
)nternal growth rate G JA1(:00/.(0I14(:55-B A1 - 0.40BKIL1 - JA1(:00/.(0I14(:55-B A1 -
0.40BKM G -.53 percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-5
Section: 44

4-54
60. The most recent financial statements for 8eng Co. are shown here4

"ssets and costs are proportional to sales. The compan maintains a constant 40 percent
di+idend pao&t ratio and a constant de*t-e2&it ratio. .hat is the maxim&m increase in sales
that can *e s&stained next ear ass&ming no new e2&it is iss&ed!
". 14:505.1(
#. 1/:(11.13
C. 1/:653.45
#! 10:46-.34
'. 10:000.03
>et&rn on e2&it G 11-:005I134:(/0 G 0.130
>etention ratio G 1 - .40 G .00
<&staina*le growth rate G A0.130 .00BIJ1 - A0.130 .00BK G .115005
?axim&m increase in sales G 1//:000 .115005 G 10:46-.34

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-6
Section: 44

4-5/
61. Consider the income statement for 8eir Dordan Corporation4

" (( percent growth rate in sales is pro,ected. .hat is the pro forma addition to retained
earnings ass&ming all costs +ar proportionatel with sales!
". 10:(66
#. 13:-0-
C. 13:560
%. 15:011
E! 15:104
>etention ratio G 10:06(I110:140 G .0/660
Pro forma addition to retained earnings G 11(:-30.50 .0/660 G 15:104

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-7
Section: 4&

4-50
6(. The <occer <hoppe has a 3 percent ret&rn on assets and a (/ percent pao&t ratio. .hat is
its internal growth rate!
". -.3( percent
#. 4.05 percent
C. 4.46 percent
%. /.(- percent
E! /./4 percent
>etention ratio G 1 - 0.(/ G 0.3/
)nternal growth rate G A0.03 0.3/BIJ1 - A0.03 0.3/BK G /./4 percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-1-
Section: 44

6-. The Parodies Corp. has a (( percent ret&rn on e2&it and a (- percent pao&t ratio. .hat
is its s&staina*le growth rate!
". 15.05 percent
#. 16.(/ percent
C. 16.46 percent
#! (0.-6 percent
'. ((.00 percent
>etention ratio G 1 - 0.(- G 0.33
<&staina*le growth rate G A0.(( 0.33BIJ1 - A0.(( 0.33BK G (0.-6 percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-1&
Section: 44

4-53
64. Consider the following information for Eale*;s Eick*oxing4

.hat is the s&staina*le rate of growth!
". 1-.53 percent
#. 14.(6 percent
C! 14.0/ percent
%. 1/.4( percent
'. 1/./5 percent
>et&rn on e2&it G .055 A1I0./4B A1 H 0.00B G 0.(003
>etention ratio G 1 - A11/:510I1-1:000B G 0.46
<&staina*le growth rate G A.(003 0.46BIJ1 - A.(003 0.46BK G 14.0/ percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-14
Section: 44

4-55
6/. .hat is the s&staina*le growth rate ass&ming the following ratios are constant!

". 10.-0 percent
! 10./- percent
C. 10.03 percent
%. 10.56 percent
'. 11.01 percent
>et&rn on e2&it G .05 1.40 1.(0 G 0.14010
>etention ratio G 1 - 0.-( G 0.05
<&staina*le growth rate G A.14010 0.05BIJ1 - A0.14010 0.05BK G 10./- percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-12
Section: 44

60. <eaweed ?fg.: )nc. is c&rrentl operating at onl 51 percent of fixed asset capacit.
C&rrent sales are 1//0:000. .hat is the maxim&m rate at which sales can grow *efore an
new fixed assets are needed!
". 14.(- percent
#. 14.43 percent
C. 1/.0- percent
%. ((.53 percent
E! (-.40 percent
F&ll capacit sales G 1//0:000I0.51 G 1036:01(
?axim&m sales growth G A036:01(I1//0:000B - 1 G (-.40 percent

AACSB: Analytic
.OC 4: 4-15
Section: 4&
!o"ic: Sales gro*t$

4-56
63. <eaweed ?fg.: )nc. is c&rrentl operating at onl 50 percent of fixed asset capacit. Fixed
assets are 1-53:000. C&rrent sales are 1/10:000 and are pro,ected to grow to 1004:000. .hat
amo&nt m&st *e spent on new fixed assets to s&pport this growth in sales!
". 10
#. 1((:0/4
C! 140:-16
%. 136:405
'. 16-:005
F&ll capacit sales G 1/10:000I0.50 G 1/6-:0(-.(0
Capital intensit ratio G 1-53:000I1/6-:0(-.(0 G 0.0/(/55(-1
Fixed asset need G A1004:000 0.0/(/55(-1B - 1-53:000 G 140:-16

AACSB: Analytic
.OC 4: 4-18
Section: 4&
!o"ic: +i/e' asset nee'

65. Fixed "ppliance Co. wishes to maintain a growth rate of 5 percent a ear: a constant de*t-
e2&it ratio of 0.-4: and a di+idend pao&t ratio of /( percent. The ratio of total assets to sales
is constant at 1.-. .hat profit margin m&st the firm achie+e!
". 1-.6( percent
#. 14.40 percent
C! 14.63 percent
%. 1/.-- percent
'. 1/.34 percent
>etention ratio G 1 - 0./( G 0.45
<&staina*le growth rate G 0.05 G A>@' 0.45BIJ1 - A>@' 0.45BKF >@' G 0.1/4-
>et&rn on e2&it G 0.1/4- G P? A1I1.-B A1 H 0.-4BF Profit margin G 14.63 percent

AACSB: Analytic
.OC 4: 4-16
Section: 44

4-60
66. " firm wishes to maintain a growth rate of 5 percent and a di+idend pao&t ratio of 0(
percent. The ratio of total assets to sales is constant at 1: and the profit margin is 10 percent.
.hat m&st the de*t-e2&it ratio *e if the firm wishes to keep that ratio constant!
". 0.0/
#. 0.40
C. 0.//
%. 0.00
E! 0.6/
>etention ratio G 1 - 0.0( G 0.-5
<&staina*le growth rate G 0.05 G A>@' 0.-5BIJ1 - A>@' 0.-5BKF >@' G 0.1646
>et&rn on e2&it G 0.1646 G 0.10 A1I1B A1 H %I'BF %I' G 0.6/

AACSB: Analytic
.OC 4: 4-17
Section: 44
!o"ic: Debt-e3uity ratio

100. " firm wishes to maintain an internal growth rate of 11 percent and a di+idend pao&t
ratio of (4 percent. The c&rrent profit margin is 10 percent and the firm &ses no external
financing so&rces. .hat m&st the total asset t&rno+er rate *e!
". 0.53 times
#. 0.60 times
C. 1.01 times
%. 1.1/ times
E! 1.-0 times
>etention ratio G 1 - 0.(4 G 0.30
)nternal growth rate G 0.11 G A>@" 0.30BIJ1 - A>@" 0.30BKF >@" G 0.1-04
>et&rn on assets G 0.1-04 G 0.10 T"TF Total asset t&rno+er G 1.-0 times

AACSB: Analytic
.OC 4: 4--9
Section: 44
!o"ic: !otal asset turnover

4-61
101. #ased on the following information: what is the s&staina*le growth rate of 8endrix
G&itars: )nc.!

". 3.05 percent
! 6./( percent
C. 11.1( percent
%. 1-.46 percent
'. 14.41 percent
Total de*t ratio G 0.00 G T%IT"
T"IT% G 1I0.00
1 H T%IT' G 1I0.00
%I' G 1IJA1I0.00B - 1K G 1.641130
>et&rn on e2&it G 0.0/0 1.30 A1 H 1.641130B G 0.(5655(
>etention ratio G 1 - 0.3 G 0.-
<&staina*le growth rate G A0.(5655( 0.-BIJ1 - A0.(5655( 0.-BK G 6./( percent

AACSB: Analytic
.OC 4: 4--1
Section: 44

4-6(
10(. Co&ntr Comfort: )nc. had e2&it of 11/0:000 at the *eginning of the ear. "t the end of
the ear: the compan had total assets of 116/:000. %&ring the ear: the compan sold no new
e2&it. =et income for the ear was 13(:000 and di+idends were 144:040. .hat is the
s&staina*le growth rate!
". 1/.-( percent
#. 1/.36 percent
C. 13.35 percent
%. 15.01 percent
E! 15.(4 percent
'nding e2&it G 11/0:000 H A13(:000 - 144:040B G 1133:-00
>et&rn on e2&it G 13(:000I1133:-00 G 0.4000
>etention ratio G A13(:000 - 144:040BI13(:000 G 0.-5
<&staina*le growth rate G A0.4000 0.-5BIJ1 - A0.4000 0.-5BK G 15.(4 percent

AACSB: Analytic
.OC 4: 4--&
Section: 44

4-6-
10-. The most recent financial statements for ?oose To&rs: )nc. follow. <ales for (006 are
pro,ected to grow * 10 percent. )nterest expense will remain constantF the tax rate and
di+idend pao&t rate will also remain constant. Costs: other expenses: c&rrent assets: and
acco&nts paa*le increase spontaneo&sl will sales. )f the firm is operating at f&ll capacit and
no new de*t or e2&it is iss&ed: how m&ch external financing is needed to s&pport the 10
percent growth rate in sales!

". 1-10:(40
! -15:1((
C. -10:305
%. 1(:403
'. 1-:-06
4-64
%i+idends G A144:04(I1111:000B 11-1:030 G 1/(:005
"ddition to retained earnings G 11-1:030 - 1/(:005 G 136:00(
'nding retained earnings G 1(05:000 H 136:00( G 1-43:00(
'xternal financing need G 1/60:440 - 1/65:/0( G -15:1((

AACSB: Analytic
.OC 4: 4--2
Section: 4&

4-6/

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Chapter 04 - Long-Term Financial Planning and Growth

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