FIN Chap 4 PDF

Chapter 4 Long-Term
Long-Term Financial Planning and Corporate Growt h
1. Financial planning helps investigate the linkages between

between goals and the
the different aspects of a firms
b!siness.
"ns# Tr!e Level# $asic %!b&ect# Financial Planning 'odels T(pe#

T(pe# Concepts
). Financial planning is important beca!se the onl(

onl( wa( for a firm to prosper
prosper is for it to grow.
grow.
"ns# False Level# $asic %!b&ect# Financial Planning T(pe#

T(pe# Concepts
*. Conventional wisdom holds

holds that financial plans dont work+ b!t financial
financial planning does.
does.
"ns# Tr!e Level# $asic %!b&ect# Financial 'anagement Goals T(pe#

T(pe# Concepts
4. ,ith good financial planning+

planning+ managers can be less vigilant in their da( to da( management of the firm.
"ns# False Level# $asic %!b&ect# Financial Planning T(pe#

T(pe# Concepts
. The firms investment and

and financing decisions are !nrelated and sho!ld not be
be anal(ed at the same time.
"ns# False Level# $asic %!b&ect# /ecision 'aking T(pe#

T(pe# Concepts
0. There are no direct connections

connections between the growth that a compan(
compan( can achieve and the financial
financial policies
!ndertaken b( the financial managers.
"ns# False Level# $asic %!b&ect# ario!s

ario!s %tatements T(pe#
T(pe# Concepts
2. 3n most ind!stries+ planning

planning be(ond the period
period of one (ear is not ver( !sef!l.
"ns# False Level# $asic %!b&ect# Planning orion T(pe#

T(pe# Concepts
5. "ggregation refers to the process b( which a firm firm first pro&ects its aggregate investment re6!irement+
re6!irement+ then
it breaks that total !p and allocates it to the investment proposals of the firms smaller !nits.
"ns# False Level# $asic %!b&ect# "ggregation T(pe#

T(pe# Concepts
7. er(
er( few financial planning
planning models re6!ire an e8ternall( s!pplied sales forecast.
forecast.
"ns# False Level# $asic %!b&ect# Planning 'odels T(pe#

T(pe# Concepts
19. :ne wo!ld e8pect the capital intensit( ratio of an a!to man!fact!ring
man!fact!ring firm to be lower than that of a
software development firm.
"ns# False Level# $asic %!b&ect# Capital 3ntensit( T(pe#

T(pe# Concepts
11. "n increase in a firms capital

capital intensit( ratio implies a decrease in how efficientl(
efficientl( it !ses its assets to
generate sales.
"ns# Tr!e Level# $asic %!b&ect# Capital 3ntensit( T(pe#

T(pe# Concepts
Cop(right ; )99 'cGraw-ill <(erson Limited. Page 1

Chapter 4 Long-Term
1). "ll else e6!al+ the lower the forecast

forecast growth the larger
larger the level of e8ternal financing needed.
needed.
"ns# False Level# $asic %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Concepts
1*. Generall( speaking+ actions that increase the firms abilit( to generate f!nds internall( decrease
decrease its abilit( to
grow witho!t obtaining e8ternal financing.
"ns# False Level# $asic %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Concepts
14. "ll else e6!al+ an increase in a firms capital intensit( ratio will increase its e8ternal
e8ternal financing needed.
"ns# Tr!e Level# $asic %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Concepts
1. "ll else e6!al+ a firm that !tilies assets inefficientl(

inefficientl( will have a higher s!stainable growth rate than a firm
that does not.
"ns# False Level# $asic %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Concepts
10. The long-range time period+ !s!all( the ne8t two to five (ears+ over which the financial planning process
foc!ses is known as the#
"? Planning hohorion.
$? Plan
lanning
ing stra
trateg(.
g(.
C? Planning agenda.
/? %hort r!n.
=? C!rr
C!rreent fina
inancin
ncing
g pe
period.
iod.
"ns# " Level# $asic %!b&ect# Planning orion T(pe#

T(pe# /efinitions
12. The process b( which smaller

smaller investment proposals of each of a firms operational !nits are added !p and
treated as one big pro&ect is known as#
"? %eparation.
$? "ggregation.
C? Conglomeration.
/? "ppropriation.
=? %triation.
"ns# $ Level# $asic %!b&ect# "ggregation T(pe#

T(pe# /efinitions
15. Pro forma

forma financial
financial statements
statements are#
are#
"? 3llegal.
$? "cco!n
"cco!nting
ting state
statemen
ments
ts filed
filed with
with the %ec!
%ec!rit
rities
ies and
and =8cha
=8changenge Commi
Commissission
on @%=C?
@%=C? .
C? "cco
"cco!n!ntin
ting
g stat
statem
emenents
ts file
filed
d with
with CC<"
CC<"..
/? Pro&ections
Pro&ections in the
the form
form of acco!
acco!nting
nting statements+
statements+ based on a sales forecast
forecast ass!mption.
ass!mption.
=? The most-
most-rec
recent
entl(
l( compile
compiled d acco!n
acco!nting
ting stat
stateme
ements
nts of the
the firm rele
release
ased
d to the p!blic
p!blic..
"ns# / Level# $asic %!b&ect# Pro Forma %tatements T(pe#

T(pe# /efinitions
Cop(right ; )99 'cGraw-ill <(erson Limited. Page )

Chapter 4 Long-Term
17. The designated so!rce@s? of e8ternal financing re6!ired

re6!ired to make the pro forma balance
balance sheet balance is
called the#
"? <eta
<etain
ined
ed earn
earnin
ings
gs acco
acco!n
!nt.
t.
$? Comm
mmo on sto
stocck ac
acco!nt.
C? /ebt-e6!it ( ratio.
/? Cash flow variab
iable.
le.
=? Pl!g variable.
"ns# = Level# $asic %!b&ect# Pl!g ariable

ariable T(pe#
T(pe# /efinitions
)9. The financial planning method in which acco!nts

acco!nts are varied depending on a firms predicted sales level
level is
called the#
"? Perc
Percen
enta
tage
ge of sale
saless app
appro
roac
ach.
h.
$? %ale
%aless dil!t
il!tio
ionn appr
pproach
oach..
C? %ale
%aless rec
recon
onci
cili
liat
atio
ion
n app
appro
roac
ach.
h.
/? Comm
Common on--sie
sie appr
approa
oacch.
=? Time-tre
trend ap
approac
oach.
"ns# " Level# $asic %!b&ect# Percentage :f %ales T(pe#

T(pe# /efinitions
)1. The dividend

dividend pa(o!t financial
financial ratio is calc!lated
calc!lated as#
"? >et
>et incom
incomee min!s
min!s addadditi
ition
onss to ret
retai
aine
nedd earn
earning
ings.
s.
$? Cash
Cash div
divide
idend
ndss divid
divideded b(
b( shar
shares
es o!t
o!tst
stan
andin
ding.
g.
C? Cash
Cash div
divid
iden
ends
ds div
divid
ided
ed b(
b( net
net inco
incomeme..
/? >et
>et inco
incomeme min!
min!ss cas
cashh div
divid
iden
ends
ds..
=? :ne
:ne pl!
pl!ss th
the ret
reten
enti
tio
on rat
ratio
io..
"ns# C Level# $asic %!b&ect# /ividend Pa(o!t <atio T(pe#

T(pe# /efinitions
)). The retention

retention ratio
ratio is calc!lated
calc!lated as#
as#
"? :ne
:ne pl!
pl!ss the
the div
divid
iden
endd pa(
pa(o!
o!tt rati
ratio.
o.
$? "ddi
"dditio
tions
ns to
to reta
retaine
inedd earn
earning
ingss divide
divided d b( net
net incom
income.e.
C? "dditio
"dditionsns to reta
retained
ined earnin
earningsgs divi
divided
ded b( shar
shares
es o!ts
o!tstan
tanding
ding..
/? >et
>et incom
incomee min!s
min!s add
additi
ition
onss to ret
retai
aine
ned
d earn
earning
ings.
s.
=? >et
>et inc
incom
omee min
min!s
!s cash
cash divi
divide
dend
nds.
s.
"ns# $ Level# $asic %!b&ect# <etention <atio T(pe#

T(pe# /efinitions
)*. The reten

retention
tion ratio
ratio
3. is e6!al to one pl!s the dividend pa(o!t
pa(o!t ratio.
33. is also known as the plowback ratio.
333. is a meas!re of a firms willingness to provide internal f!nds for
for f!t!re growth.
"? 3 onl(
$? 333 onl(
C? 3 and 33 onl(
/? 33 and 333 onl(
=? 3+ 33+ and 333
"ns# / Level# $asic %!b&ect# <etention <atio T(pe#

T(pe# /efinitions
Cop(right ; )99 'cGraw-ill <(erson Limited. Page *

Chapter 4 Long-Term
)4. The capital

capital intensit(
intensit( ratio is calc!lated
calc!lated as#as#
"? Long
Long-t-ter
ermm debt
debt tim
times
es tota
totall asse
assets
ts..
$? >et
>et fi8e
fi8ed
d ass
asset
etss divi
divide
ded
d b(
b( cre
credi
ditt sal
sales
es..
C? >et
>et fi8
fi8ed
ed asse
assets
ts time
timess tot
total
al sale
sales.
s.
/? Total asse
assets
ts divid
divided ed b( tota
totall sal
sales
es..
=? Total
tal sal
sales
es divi
divide
ded d b( tota
totall asse
assets
ts..
"ns# / Level# $asic %!b&ect# Capital 3ntensit( <atio T(pe#

T(pe# /efinitions
). The AAAAAAAAA is the amo!nt of assets assets needed to generate B1 in sales.
"? capit
apitaal inte
inten nsit(
sit( rati
ratio
o
$? fi8e
fi8ed-
d-as
asse
sett !til
!tili
iat
atio
ionn rati
ratio
o
C? internal growth rate
/? plowback ratio
=? long
long-t
-teerm solv
solven
enc(
c( ratio
atio
"ns# " Level# $asic %!b&ect# Capital 3ntensit( <atio T(pe#

T(pe# /efinitions
)0. The internal

internal growth
growth rate of a firm is best describ
describeded as#
"? The mini
minim!m
m!m growt
growthh rate
rate achiev
achievabl
ablee if the firm
firm does
does not
not pa( o!t
o!t an( cash
cash divide
dividends
nds..
$? The minim
minim!m
!m growth
growth rate
rate achiev
achievabl
ablee if the firm
firm mainta
maintains
ins a const
constant
ant e6!it(
e6!it( m!ltip
m!ltiplie
lier.
r.
C? The ma8i
ma8im!m
m!m grow
growth
th rate
rate achie
achievab
vable
le witho
witho!t
!t e8ter
e8ternal
nal fina
financi
ncing
ng of an( kind.
kind.
/? The ma8im!m
ma8im!m growth
growth rate achievable
achievable witho!t
witho!t !sing
!sing an(
an( e8terna
e8ternall e6!it(
e6!it( financi
financing+
ng+ while
while
maintaining a constant debt-e6!it( ratio.
=? The ma8im!
ma8im!m m growth
growth rate
rate achieva
achievable
ble witho
witho!t
!t an( limits
limits on
on the amo!n
amo!ntt of debt fina
financi
ncing
ng !sed.
!sed.
"ns# C Level# $asic %!b&ect# 3nternal Growth <ate T(pe#

T(pe# /efinitions
)2. "ll else e6!al+ an increase in a firms dividend pa(o!t ratio

ratio will decrease its AAAAAAAAAA.
3. s!stainable growth rate
33. internal growth rate
333. e8ternal financing needed
needed
"? 3 onl(
$? 33 onl(
C? 3 and 33 onl(
/? 3 and 333 onl(
=? 33 and 333 onl(

T(pe# Concepts
)5. The s!stainable growth rate of a firm

firm is best
best described as#
"? The mini
minim!m
m!m growt
growthh rate
rate achiev
achievabl
ablee if the firm
firm does
does not
not pa( o!t
o!t an( cash
cash divide
dividends
nds..
$? The minim
minim!m
!m growth
growth rate
rate achiev
achievabl
ablee if the firm
firm mainta
maintains
ins a const
constant
ant e6!it(
e6!it( m!ltip
m!ltiplie
lier.
r.
C? The ma8i
ma8im!m
m!m grow
growth
th rate
rate achie
achievab
vable
le witho
witho!t
!t e8ter
e8ternal
nal fina
financi
ncing
ng of an( kind.
kind.
/? The ma8im!m
ma8im!m growth
growth rate achievable
achievable witho!t
witho!t !sing
!sing an(
an( e8terna
e8ternall e6!it(
e6!it( financi
financing+
ng+ while
while
maintaining a constant debt-e6!it( ratio.
=? The ma8im!
ma8im!m m growth
growth rate
rate achieva
achievable
ble witho
witho!t
!t an( limits
limits on
on the amo!n
amo!ntt of debt fina
financi
ncing
ng !sed.
!sed.
"ns# / Level# $asic %!b&ect# %!stainable Growth <ate T(pe#

T(pe# /efinitions

Chapter 4 Long-Term
)7. 3f a firm wants to maintain its c!rrent

c!rrent ratio of debt to e6!it(+
e6!it(+ its c!rrent dividend pa(o!t
pa(o!t ratio+ and does not
want to sell an( new e6!it(+ the firms growth rate in sales and assets m!st be less than or e6!al to its
"? divide
idend pa
pa(o!t
o!t ra
ratio
tio
$? retention ratio
C? s!s
s!stain
tainaable
ble grow
growth
th rate
rate
/? grow
growthth rate
rate with
with no e8te
e8tern
rnalal fina
financ
ncing
ing
=? pro&
pro&eected
ted sa
sales
les gro
growt
wthh rat
ratee
"ns# C Level# $asic %!b&ect# %!stainable Growth <ate T(pe#

T(pe# /efinitions
*9. ,hen pro&ecting growth+ the point where the re6!ired increase in assets
assets is e6!al to the addition to retained
earnings is called the#
"? =6!i
=6!ililib
bri!m
ri!m growt
rowth
h ra
rate.
te.
$? =8te
8ternal gr
growth
owth rate.
C? 3nter
ternal
nal gr
growth rate.
te.
/? %!sta
!staininab
able
le growt
rowth
h ra
rate.
te.
=? Pro-forma gr growth rate.
te.

T(pe# /efinitions
*1. The two ke( dimensions

dimensions of financi
financial al planning
planning are#
"? Capi
Capita
tall b!dg
b!dget
eting
ing and
and cap
capita
itall str
str!c
!ct! t!re
re..
$? The
The gro
growtwth
h rate
rate and
and div
divididen
end d poli
polic( c(..
C? The
The plan
plannin
ning
g hori
horio
onn and
and aggr
aggreg egat
ation
ion..
/? "ggr
"ggreg
egat
atio
ion
n and
and capi
capita
tall str!c
str!ct!t!re
re..
=? The growth
growth rate
rate and
and the
the marke
markett val!e
val!e of sharshareho
eholde
lders
rs e6!it(
e6!it(..
"ns# C Level# $asic %!b&ect# Financial Planning /imensions T(pe#

T(pe# /efinitions
*). " pro&ection !sing the most optimistic

optimistic ass!mptions is called a@n?#
"? Foc!sed pro&ectionion.
$? $ase case scenario.io.
C? Li6!
i6!idit
idit(
( ba
based
sed pro
pro--forma
orma..
/? $est case scenario.
io.
=? "ggr
"ggreg
egat
ateed fin
finan
anci
cial
al plan
plan..
"ns# / Level# $asic %!b&ect# $est Case %cenario T(pe#

T(pe# /efinitions
**. /etermining the amo!nt of li6!idit( needed b( a firm is referred

referred to as the#
"? Capi
Capita
tall b!dg
b!dgetetin
ing g deci
decisi
sion
on..
$? Capi
Capita
tall str
str!c
!ct!
t!re
re poli
polic(
c(..
C? ,orking
king capi
capita
tall deci
decisi
sion
on..
/? "ggr
"ggregegat
atio
ionn pla
plann
nnin
ing
g dec
decisisio
ion.
n.
=? Fina
inancin
ncing g po
polic(
lic( dec
decisio
ision.
n.
"ns# C Level# $asic %!b&ect# ,orking

,orking Capital /ecision T(pe#
T(pe# /efinitions
Cop(right ; )99 'cGraw-ill <(erson Limited. Page 

Chapter 4 Long-Term
*4. The o!tp!ts

o!tp!ts of a financial
financial planning
planning model are called#called#
"? "ggr
"ggregegat
ateed state
tateme
mentnts.
s.
$? Plan
Planni
ning
ng hori
horio
onn stat
statem
emenents
ts..
C? Pro&
Pro&ec
ecte
ted
d sta
state
teme
ment
ntss of posi
positi
tion
on..
/? ,orking
rking capit
capital
al sta
statem
temenents
ts of
of pos
posit
ition
ion..
=? Pro-forma st statements.ts.
"ns# = Level# $asic %!b&ect# Pro-Forma %tatements T(pe#

T(pe# /efinitions
*. The retention

retention ratio
ratio is also called the AAAAA
AAAAA ratio.
ratio.
"? Plowback
$? =arnings held
C? /ividends pa(abl e
/? <etained ea
earnings
=? >et income
"ns# " Level# $asic %!b&ect# <etention <atio T(pe#

T(pe# /efinitions
*0. Total assets divided b( sales is called the AAAAA ratio.

"? Capital inintensit(
$? <et!rn on assets
C? Capital b!dgeting
/? Total
tal as
asset t!
t!rnover
=? 3nterval memeas!re
"ns# " Level# $asic %!b&ect# Capital 3ntensit( <atio T(pe#

T(pe# /efinitions
*2. The s!stainab

s!stainable
le growth
growth rate is defined
defined as#
as#
3 =8cl!ding additional e6!it( financing.
33 =8cl!ding an( kind of e8ternal financing.
333 3ncl!ding a variable debt-e6!it( ratio.
3 3ncl!ding a constant debt-e6!it( ratio.
"? 33 onl(.
$? 3 and 333 onl(.
C? 33 and 333 onl(.
/? 3 and 3 onl(.
=? 33 and 3 onl(.
"ns# / Level# $asic %!b&ect# %!stainable Growth <ate T(pe#

T(pe# /efinitions
*5. The internal

internal growth
growth rate is defined
defined as#
as#
"? @<:
@<:"?
"?@<
@<?D
?D E 1 - @<:"
@<:"?@?@<?
<?D.
D.
$? @<:=
@<:=?@?@<?
<?DD E 1
1 - @<:
@<:=?
=?@<
@<??D.
C? @<:"
@<:"?@?@<?
<?DD E 1
1 - @<:
@<:=?
=?@@<?D
<?D.
/? @<:
@<:=?
=?@<
@<?D
?D E 1  @<:"
@<:"?@?@<?
<?D.
D.
=? @<:"
@<:"?@?@<?
<?DD E 1  @<:
@<:"?
"?@<
@<??D.
"ns# " Level# $asic %!b&ect# 3nternal Growth <ate T(pe#

T(pe# /efinitions

Chapter 4 Long-Term
*7. The dividend

dividend pa(o!t ratio
ratio is defined as cash dividends
dividends divided
divided b(#
"? %ales.
$? >et income.
C? Total as
assets.
/? <etained earning
ings.
=? Total e6!it(.
"ns# $ Level# $asic %!b&ect# /ividend Pa(o!t <atio T(pe#

T(pe# /efinitions
49. ,hen a firm chooses to b!( new fi8ed assets it is making a AAAAAAAAAAAAAA decision.
"? capital b!
b!dgeting
$? capital str!ct!re
C? financing
/? working cacapital
=? dividend polic(
"ns# " Level# $asic %!b&ect# Capital $!dgeting T(pe#

T(pe# Concepts
41. ,hen a firm makes decisions regarding

regarding its investment in inventor( and acco!nts
acco!nts receivable it is making a
AAAAAAAAAAAAAAAA decision.
"? capital b!
b!dgeting
C? financing
=? dividend polic(
"ns# / Level# $asic %!b&ect# ,orking

,orking Capital T(pe#
T(pe# Concepts
4). man Corp. has &!st decided to lower its amo!nt of debt
debt o!tstanding+ replacing
replacing it with the proceeds from a
new e6!it( iss!e. This ad&!stment is a AAAAAAAAAAAAAAAAAA decision.
"? capital b!
b!dgeting
C? financing
=? dividend polic(
"ns# $ Level# $asic %!b&ect# Capital %tr!ct!re T(pe#

T(pe# Concepts
4*. ,hich of the following is a basic polic( element of financial planningH

3. The capital
capital b!dgeting decision
33. The dividend polic( decision
333. The net working capital decision
decision
"? 3 onl(
$? 33 onl(
C? 3 and 33 onl(
/? 33 and 333 onl(
=? 3+ 33+ and 333
"ns# = Level# $asic %!b&ect# Financial Planning T(pe#

T(pe# Concepts

Chapter 4 Long-Term
44. ,hich of the following is >:T a basic polic( element of financial planningH
"? The
The firm
firmss need
needed
ed inv
inves
estme
tmentnt in new
new fi8
fi8ed
ed ass
asset
ets.
s.
$? The degree
degree of financ
financial
ial levera
leverage
ge a firm
firm choos
chooseses to
to emplo
emplo((.
C? The amo!
amo!nt nt of cash
cash the firm
firm think
thinkss is necess
necessar(
ar( and
and appro
appropria
priate
te to pa( shar
shareho
eholder
lders.
s.
/? The level
level of sales
sales grow
growthth the
the marke
markett will
will provi
providede in
in f!t!r
f!t!ree (ears
(ears..
=? The amo!
amo!nt nt of li6!
li6!idit(
idit( and work
working
ing capi
capital
tal the
the firm
firm needs
needs onon an ongo
ongoing
ing basi
basis.
s.
"ns# / Level# $asic %!b&ect# Financial Planning T(pe#

T(pe# Concepts
4. ,hich of the following is the firstfirst dimension of the financial planning processH
processH
"? =sta
=stabl
blis
ishh a plan
plannining
ng hori
horio
on.
n.
$? %et a divi
ividend po polic(
ic(.
C? "ggr
"ggregegate
ate the
the fir
firm
mss inv
inves
estme
tmentnt pro&
pro&ec
ects
ts..
/? Create
Create alte
alterna
rnative
tive sets
sets of
of ass!m
ass!mptio
ptions
ns abo!
abo!tt import
important
ant vari
variabl
ables.
es.
=? Cons
Constrtr!c
!ctt pro
pro form
formaa fin
finan
anci
cial
al stat
stateme
ements
nts..
"ns# " Level# $asic %!b&ect# Financial Planning T(pe#

T(pe# Concepts
40. For financial planning p!rposes+ we generall( define the short r!n as AAAAAAAAAAA+ and the long r!n
r!n as
AAAAAAAAAAAA.
"? ) (earsI *- (ears
$? 1 (earI )-
)-0 (ears
C? 1 (earI )-
)- (ears
/? ) (earsI *-0 (ears
=? 1 (e
(earsI )-
)-4 (e
(ears
"ns# C Level# $asic %!b&ect# Planning orion T(pe#

T(pe# Concepts
42. ,hich of the following statements

statements abo!t financial
financial planning is >:T correctH
"? Financial
Financial plannin
planning g provides
provides a poor
poor wa( of checkin
checking g that
that the goals and plans
plans made with regard
regard to
specific areas of a firms operations are feasible and internall ( consistent.
$? The financi
financial
al plan
plan provides
provides the opport!
opport!nit(
nit( for
for the
the firm
firm to develop
develop++ anal(e+
anal(e+ and compare
compare man(
different scenarios in a consistent wa(.
C? " financial
financial plan makes
makes e8plicit
e8plicit the consistenc(
consistenc( between
between planned
planned growth and stated
stated financial
financial policies
policies..
/? :ne ofof the p!rposes
p!rposes of of financi
financial
al planning
planning is to avoid s!rprises
s!rprises and
and develop
develop contingenc(
contingenc( plans.
plans.
=? Growth+
Growth+ b( itself
itself++ is not
not an appr
appropr
opriat
iatee goal
goal for the fina
financi
ncial
al manag
manager
er..
"ns# " Level# $asic %!b&ect# Financial Planning T(pe#

T(pe# Concepts
45. ,hich of the following statements

statements regarding financial planning is acc!rateH
"? Financial
Financial planning
planning ins!res
ins!res a firm
firm will
will not be s!rpri
s!rprised
sed b( !nfore
!nforeseen
seen f!t!re
f!t!re events.
events.
$? $( !sing
!sing financia
financiall planning+
planning+ a firm
firm can
can clearl(
clearl( identif(
identif( its options
options for the coming
coming fifteen
fifteen (ears.
(ears.
C? The !se
!se of financial
financial plannin
planningg allows
allows a firm to eliminate
eliminate the interac
interactions
tions between
between its operating
operating
policies and its financing policies.
/? Financ
Financial
ial plann
planning
ing allow
allowss a firm
firm to plan
plan for the
the f!t!r
f!t!ree in a s(stem
s(stematic
atic fash
fashion
ion..
=? Financial
Financial plannin
planning
g takes
takes the
the b!rden
b!rden off
off the financi
financial
al manager
manager and places
places it on the operati
operations
ons
manager who m!st carr( o!t the plan as laid o!t.

T(pe# Concepts

Chapter 4 Long-Term
47. ,hen a firm !ses a financial plan to develop+ anal(e+ and compare compare vario!s scenarios
scenarios in a consistent wa(+
wa(+
the firm benefits b( better !nderstanding#
"? The inte
interac
raction
tionss of its
its opera
operation
tionss and change
changess in inter
interestest rate
rates.
s.
$? The linkage
linkagess b betw
etween
een diffe
differen
rentt inve
investme
stment
nt propos
proposals
als..
C? The
The e8p
e8pec
ecte
tedd f!t!
f!t!re
re stat
statee of
of the
the econ
econom(
om(..
/? The feasib
feasibilit(
ilit( of its
its past
past capita
capitall b!dge
b!dgeting
ting decisio
decisions.
ns.
=? The
The relia
reliabi
bilit
lit(
( of
of its
its empl
emplo( o(ee
eess and
and mana
manage
gemen
ment.
t.
"ns# $ Level# $asic %!b&ect# Financial Planning T(pe#

T(pe# Concepts
9. $( developing a financial

financial plan a firm
firm benefits b( being forced to#
3. Think abo!t and forecast the f!t!re.
f!t!re.
33. Foc!s on best case scenarios.
333. %et goals and establish priorities.
"? 3 onl(
$? 3 and 33 onl(
C? 3 and 333 onl(
/? 33 and 333 onl(
=? 3+ 33+ and 333
"ns# C Level# $asic %!b&ect# Financial Plan $enefits T(pe#

T(pe# Concepts
1. ,hich of the following does

does >:T correctl( complete this sentence. JThe benefits of financial planning
incl!de AAAAAAAAAAAAAAAAAAA.J
"? making
making clear
clear the
the linkage
linkagess between
between inves
investmen
tmentt proposa
proposalsls and fina
financin
ncing
g needs
needs
$? avoidin
avoidingg s!rpri
s!rprises
ses and develo
developing
ping conting
contingenc
enc(( plans
plans
C? elimina
eliminating
ting interna
internall consis
consistenc
tenc(( of goals
goals acr
across
oss firm
firm divi
divisio
sions
ns
/? provid
providing
ing for
for the
the e8plor
e8plorati
ation
on of var
vario!s
io!s inve
investme
stment
nt and
and financ
financing
ing optio
options
ns
=? !nders
!nd erstan
tanding
ding the impa
impact
ct sale
saless growth
growth will have
have on fina
financi
ncing
ng need
needss
"ns# C Level# $asic %!b&ect# Financial Planning T(pe#

T(pe# Concepts
). $ased on (o!r financial plan+ it is likel( that (o!r firm will be !nable to sell all of the !nits of (o!r prod!ct
prod!ced over the planning horion. This s!ggests a need to make changes in
"? capit
apitaal str
str!c
!ct!
t!re
re poli
polic( c(
$? dividend polic(
C? net
net work
workin ing
g capi
capita
tall deci
decisi
sion
onss
/? capi
capita
tall b!dg
b!dgetetin
ing
g deci
decisi sion
onss
=? wage polic(ic( decisio
ision ns

T(pe# Concepts

Chapter 4 Long-Term
*. ,hich of the following is a common element among financial

financial planning modelsH
modelsH
3. "sset re6!irements
33. Pro forma statements
333. %ales forecasts
"? 3 onl(
$? 33 and 333 onl(
C? 3 and 33 onl(
/? 3 and 333 onl(
=? 3+ 33+ and 333
"ns# = Level# 3ntermediate %!b&ect# Financial Planning T(pe#

T(pe# Concepts
4. " financial

financial plan sho!ld contain AAAAAAAAAAAAAA which provide
provide a model of the firms asset
asset str!ct!re for the
(ears to come.
"? pro
pro for
forma
ma sales
ales forec
orecaasts
sts
$? pro
pro for
forma
ma inco
incomeme state
tateme
ment ntss
C? pro
pro for
forma
ma fina
financ
ncia
iall re6
re6!i
!irereme
mentntss
/? pro
pro for
forma bala
balanc
ncee sheet
heetss
=? com
ommo
mon-n-si
sie
e bala
balanc
ncee she
sheet etss
"ns# / Level# 3ntermediate %!b&ect# Pro Forma $alance %heet T(pe#

T(pe# Concepts
. ,hich of the following can be comp!ted directl( from a pro forma balance sheetH
"? C!rrent ratio
$? 3nven
ventor
tor( t!rnover
C? Profit margin
/? "ddi
"dditition
onss to net
net fi8e
fi8ed
d asse
assets
ts
=? 3nterval me
meas!re
"ns# " Level# 3ntermediate %!b&ect# Pro Forma $alance %heet T(pe#
T(pe# Concepts
0. 3n a financial plan+ the AAAAAAAAAAAAA

AAAAAAAAAAAAA of a firm provide a g!ide for changes in liabilities and capital.
capital.
"? sale
saless gr
growth
owth e8p
e8peectat
ctatio
ionns
$? fina
financ
ncining
g and
and divi
divide
dend
nd poli
polici
cies
es
C? s!st
s!stai
aina
nable
ble grow
growthth rate
rate e8pe
e8pect
ctat
ation
ionss
/? pro
pro for
forma
ma inc
inco
ome sta
state
teme
ment
ntss
=? wor
workin
king capit
apital
al polic
olicie
iess
"ns# $ Level# 3ntermediate %!b&ect# Financial Plan T(pe#

T(pe# Concepts
2. The AAAAAAAAA portion

portion of a firms
firms financial plan contains
contains the firms dividend and debt policies.
"? sales forecast
$? asset re
re6!irement
C? fina
inancia
nciall re6!
e6!irem
iremeents
nts
/? capital b!
b!dgeting
=? li6!idit( needs
"ns# C Level# $asic %!b&ect# Financial <e6!irements T(pe#

T(pe# Concepts

Chapter 4 Long-Term
5. The Jpl!gJ

Jpl!gJ fig!re in a financial
financial plan
plan represents
represents the#
the#
"? 3ncrea
3ncrease
se in
in asset
assetss neces
necessar
sar(( to s!p
s!ppor
portt pro&e
pro&ecte
cted
d sales
sales..
$? =8tern
=8ternal
al fina
financi
ncing
ng needed
needed to s!pp
s!pport
ort the financ
financial
ial plan.
plan.
C? Change
Change in reta
retaine
inedd earni
earning
ngss attrib
attrib!ta
!table
ble to pro&
pro&ect
ected
ed sale
sales.s.
/? Level
Level of
of new
new fi8ed
fi8ed assets
assets contai
contained
ned in the
the fina
financi
ncial
al plan
plan..
=? Level
Level of divi
dividen
dendsds the
the firm
firm has
has paid
paid over
over rece
recent
nt (ear
(ears.
s.

T(pe# Concepts
7. 3n creating pro forma statements+ if we ass!me that costs+

costs+ assets+ and short-term debt var( directl( with
changes in sales+ that the pa(o!t ratio is fi8ed+ and that the change in long-term debt onl( res!lts from
pa(ments made as re6!ired on the debt contracts+ then the Jpl!gJ re6!ired for the balance sheet to balance
will probabl( be#
"? /ividends.
$? Total debt.
C? Long-term dedebt.
/? >ew e6!it ( sales.
=? <etained ea
earnings.
"ns# / Level# 3ntermediate %!b&ect# Pl!g ariables

ariables T(pe#
T(pe# Concepts
09. The percentage of sales approach to financial planning re6!ires#

"? "ll asse
assetsts and
and liab
liabilit
ilities
ies change
change at the
the same
same rate
rate as sales.
sales.
$? The divide
dividendnd polic(
polic( remain
remain !nchan
!nchanged
ged from
from (ear
(ear to (ear.
(ear.
C? The
The fir
firm
m bebe ope
operaratin
ting
g at
at f!ll
f!ll capa
capaci
cit(
t(..
/? %epara
%eparating
ting acco!n
acco!nts ts into
into those
those that
that var(
var( with sale
saless and
and those
those that
that do not.
not.
=? The
The fir
firm
mss ssal
ales
es to incr
increa
ease
se each
each (ear
(ear..
"ns# / Level# $asic %!b&ect# Percentage :f %ales T(pe#

T(pe# Concepts
01. 3f total assets increase b( the same percentage as sales increase+

increase+
3. it is likel( assets and sales will increase
increase b( identical dollar amo!nts.
33. the larger the increase
increase in sales+ the more likel( there will be a need for e8ternal financing.
financing.
333. the firm is ass!med to be operating
operating at f!ll capacit(.
"? 3 onl(
$? 333 onl(
C? 3 and 333 onl(
/? 33 and 333 onl(
=? 3+ 33+ and 333
"ns# / Level# 3ntermediate %!b&ect# Percentage :f %ales T(pe#

T(pe# Concepts
0). "ss!me (lon+ 3nc. is c!rrentl(

c!rrentl( operating at less than f!ll capacit(. ,hich of the following wo!ld be
L="%T likel( to var( directl( with salesH
"? >otes pa(able
$? "cco!nts receiva
ivable
C? "cco!nts pa(able
/? 3nventor(
=? Cash
"ns# " Level# 3ntermediate %!b&ect# Percentage :f %ales T(pe#

T(pe# Concepts

Chapter 4 Long-Term
0*. 3f we ass!me for forecasting

forecasting p!rposes that the firms firms fi8ed assets will increase directl(
directl( with sales+ we are
effectivel( ass!ming that the firm#
"? as
as nnoo !n!
!n!sesed
d capa
capaci
cit(
t( in
in its
its fi8e
fi8edd ass
asset
ets.
s.
$? 3s c!r
c!rre
rentl
ntl(
( !til
!tili
iing
ing its c!rr
c!rren entt asse
assets
ts at
at 199K.
199K.
C? 3s prod
prod!c
!cin
ingg more
more goo
goods
ds tha
thann it sel
sells
ls..
/? as
as nnoo e8c
e8ces
esss wor
worki
king
ng capi
capitatal.
l.
=? Can increa
increasese prod
prod!ct
!ction
ion witho!t
witho!t an( e8terne8ternal
al fina
financi
ncing
ng need
needed.
ed.
"ns# " Level# $asic %!b&ect# Percentage :f %ales T(pe#

T(pe# Concepts
04. The Limberger 3nstit!te is c!rrentl(

c!rrentl( operating at f!ll capacit(.
capacit(. ,hich balance sheet items wo!ld most
likel( var( directl( with salesH
3. Fi8ed assets
33. Long-term debt
333. "cco!nts receivable
"? 3 onl(
$? 33 onl(
C? 3 and 333 onl(
/? 33 and 333 onl(
=? 3+ 33+ and 333
"ns# C Level# $asic %!b&ect# Percentage :f %ales T(pe#

T(pe# Concepts
0. "ll else the same+ a firms capital intensit( ratio will increase if AAAAAAAAAAAAAAAAAA.
"? acco!
cco!nnts pa(
pa(ab
able
le dec
decrrease
ase
$? net inc
income inc
increases
C? sales decrease
/? assets decrease
=? cost
ost of
of good
goodss sso
old inc
increase
ease
"ns# C Level# $asic %!b&ect# Capital 3ntensit( <atio T(pe#

T(pe# Concepts
00. "ss!me a firm is c!rrentl( operating at f!ll capacit(.

capacit(. %ales are forecast
forecast to increase b( )9K ne8t
ne8t (ear.
'anagement co!ld do each of the followin g =C=PT#
"? "ttempt
"ttempt toto restr
restrain
ain sale
saless growth
growth soso that
that no new
new fi8ed
fi8ed asse
assets
ts are
are needed
needed..
$? 3ncrea
3ncrease
se the
the firms
firms inve
investme
stmentnt in fi8e
fi8edd assets
assets to
to meet
meet the adde
added d demand
demand..
C? %!bcontract
%!bcontract with other man!fact!r
man!fact!rersers to increas
increasee prod!cti
prod!ction
on and
and meet
meet the
the added
added demand.
demand.
/? Lease
Lease additio
additional
nal e6!ipme
e6!ipment nt to meet
meet the
the adde
addedd dema
demand.
nd.
=? "c6!ir
"c6!iree more
more c!rren
c!rrentt asset
assetss in order
order to
to meet
meet the
the added
added dema
demand.
nd.
"ns# = Level# 3ntermediate %!b&ect# Firm Capacit( T(pe#

T(pe# Concepts
Cop(right ; )99 'cGraw-ill <(erson Limited. Page 1)

Chapter 4 Long-Term
02. "ll else the same+ which of the following

following wo!ld likel( be associated
associated with a firm which has a high capital
intensit( ratio+ relative to other firms in the same ind!str(H
3. Lower fi8ed asset t!rnover ratio
33. Lower ret!rn on assets @<:"? ratioratio
333. Greater depreciation e8pense
"? 3 and 33 onl(
$? 33 onl(
C? 3 and 333 onl(
/? 33 and 333 onl(
=? 3+ 33+ and 333
"ns# = Level# 3ntermediate %!b&ect# Capital 3ntensit( <atio T(pe#

T(pe# Concepts
05. "ll else the same+ the level of e8ternal

e8ternal financing needed @=F>? increases with increases in the#
"? Profit margin.
$? <etention ratio.
C? "cco
"cco!n!ntsts rec
recei
eiva
vabl
blee t!rn
t!rnovover
er rat
ratio
io..
/? Capi
Capita
tall int
inten
enssit(
it( ratio
tio.
=? Fi8e
Fi8edd asse
assett !til
!tili
iat
atio
ionn rati
ratio.
o.
"ns# / Level# 3ntermediate %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Concepts
07. %!ppose a firm is working at f!ll f!ll capacit( and that that assets+ costs+ andand all liabilities are tied directl( to the
level of sales. 3n addition+ the firm pa(s o!t all its earnings as dividends+ and sales are e8pected to increase
b( 19K ne8t period. The firm is financed half with e6!it( and half with debt. The e8ternal financing
needed to s!pport this growth#
"? 3s ero
ero since
since all
all liabili
liabilitie
tiess are
are tied
tied direc
directl(
tl( to
to the level
level of sales.
sales.
$? /epe
/ependndss on the
the prof
profit
it marg
margin in..
C? 3s e6!a
e6!all to hal
halff the
the dolla
dollarr incr
increaease
se in
in ass
asset
ets.
s.
/? 3s e6!al
e6!al to
to twic
twicee the
the dollar
dollar increa
increasese in liabili
liabilitieties.
s.
=? 3s e6!a
e6!all to the
the gro
growt
wthh rat
ratee time
timess tota
totall asse
assets
ts..
"ns# C Level# Challenge %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Concepts
29. %ales growth

growth AAAAAA
AAAAAAAAAAAA
AAAAAAAAAAA
AAAAA..
"? will
will t(pic
t(pical
all(
l( lea
lead
d to grow
growthth in
in c!rr
c!rren
entt asse
assets
ts
$? will
will a!to
a!tomati
matical
call(
l( lea
leadd to
to incr
increas
eases
es in long-te
long-termrm debt
debt
C? is the
the least
least impor
importan
tantt item to forec
forecast
ast in
in the fina
financi
ncial
al plann
planning
ing proc
process
ess
/? will re6!ir
re6!iree additions
additions to netnet fi8ed
fi8ed assets
assets for firms operating
operating at
at less
less than
than f!ll
f!ll capacit(
capacit(
=? of less
less than
than 19K will makemake =F>=F> negat
negative
ive++ crea
creating
ting a s!rp
s!rpl!s
l!s
"ns# " Level# 3ntermediate %!b&ect# =F> "nd %ales Growth T(pe#
T(pe# Concepts
21. 3f (o!r firm is c!rrentl(

c!rrentl( operating at f!ll capacit( and (o! (o! e8pect strong sales growth over
over the ne8t few
(ears+ (o! sho!ld most likel(#
likel (#
"? =8pe
=8pect
ct that
that asse
assets
ts will
will not
not gro
groww.
$? <aise
<aise (o!
(o!rr divid
dividend
end pa(o!t
pa(o!t to accomm
accommoda
odatete the growth
growth..
C? P!t off
off an(
an( f!rth
f!rther
er fina
financi
ncial
al plann
planning
ing !ntil
!ntil sale
saless growt
growthh modera
moderates
tes..
/? =8pe
=8pect
ct e8te
e8tern
rnal
al fin
finan
anci
cing
ng will
will be
be nee
neede
ded.
d.
=? =8pec
=8pectt the growth
growth in in retai
retained
ned earnin
earnings
gs to
to o!tpa
o!tpace ce the
the growth
growth in sale
sales.
s.
"ns# / Level# 3ntermediate %!b&ect# %ales Growth T(pe#

T(pe# Concepts
Cop(right ; )99 'cGraw-ill <(erson Limited. Page 1*

Chapter 4 Long-Term
2). ,h( is it important

important to determine
determine if a firm is operating
operating at f!ll capacit(
capacit( or notH
notH
"? $eca!se
$eca!se a firm that
that is operating
operating at
at less than f!ll capacit(
capacit( will not
not need
need an( e8ternal
e8ternal financin
financing.
g.
$? $eca!se
$eca!se in a firm that
that is opera
operating
ting at less than
than f!ll
f!ll capacit(
capacit(++ fi8ed
fi8ed assets
assets will t(picall(
t(picall( increa
increase
se at the
the
same percent as sales.
C? $eca!se
$eca!se a firm with e8cess
e8cess capacit(
capacit( has some room to e8pand
e8pand sales witho!t increasing
increasing the
investment in fi8ed assets.
/? $eca!se+
$eca!se+ for
for a given
given increase
increase in sales+
sales+ firms
firms operating
operating at less
less than f!ll capacit(
capacit( will e8perie
e8perience
nce more
more
rapid asset growth than firms that do operate at f!ll capacit(.
=? $eca!s
$eca!see onl(
onl( firms
firms oper
operati
ating
ng at
at f!ll
f!ll capa
capacit(
cit( can grow
grow rapid
rapidl(l(..
"ns# C Level# 3ntermediate %!b&ect# Capacit( sage T(pe#

T(pe# Concepts
2*. Mo!
Mo! wish to comp!te a firms internal growth rate from its acco!nting statements. To do so+ (o! co!ld !se
the val!es of
"? tota
totall asse
assets+
ts+ net
net inc
incomome+
e+ and
and the
the ret
reten
entio
tion
n ratio
ratio
$? c!rren
c!rrentt asse
assets+
ts+ interes
interestt paid
paid++ and
and stockh
stockhold
olders
ers e6!i
e6!it(
t(
C? net
net incom
income+ e+ e6!
e6!it(
it(++ and
and the
the div
divide
idend
nd pa(
pa(o!
o!tt ratio
ratio
/? c!rren
c!rrentt liab
liabilit
ilities
ies++ fi8e
fi8ed
d assets
assets++ and
and total
total asse
assets
ts
=? net
net inco
incomeme++ e6!
e6!itit((+ and
and tot
total
al asse
assets
ts
"ns# " Level# 3ntermediate %!b&ect# 3nternal Growth <ate T(pe#

T(pe# Concepts
24. Choose the most complete

complete definition of the JbestJ financial plan for a firm.
firm.
"? The plan
plan that
that res!
res!lts
lts in the lowe
lowestst level
level of
of e8ter
e8ternal
nal fina
financi
ncing
ng neede
neededd
$? The plan
plan that
that incorpor
incorporates
ates the firms
firms long range policies
policies while
while maintainin
maintaining
g sales
sales growth
growth atat or below
the s!stainable growth rate
C? The plan
plan which
which address
addresseses the firms long range
range policies
policies and whose foc!s is to increa
increase
se sharehold
shareholderer
wealth
/? The plan
plan that
that res!lts
res!lts in the largest
largest sales
sales growth each (ear while maintai
maintaining
ning e8terna
e8ternall financing
financing
needed at or near ero
=? The plan
plan that
that is the simples
simplestt to !se
!se (et
(et is comple8
comple8 eno!gh
eno!gh to cover ever( poss
possible
ible state
state of
of nat!re
nat!re that
that
might occ!r
"ns# C Level# 3ntermediate %!b&ect# Financial Plan T(pe#

T(pe# Concepts
2. "ll else the same+ s!stainable growth will decrease

decrease with increases in AAAAAAAAAAAAA.
"? earning
ings retention
ion
$? net income
C? total asset t!r
t!rnover
/? profit ma
margin
=? total e6!it(
"ns# = Level# 3ntermediate %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Concepts
20. ,hich of the following is a factor in calc!lating s!stainable

s!stainable growthH
"? C!rrent ratio
$? Profit margin
C? 3nven
ventor
tor( t!rnover
/? Cash ratio
=? Cash co
coverage ra
ratio
"ns# $ Level# 3ntermediate %!b&ect# %!stainable Growth T(pe#

T(pe# Concepts

Chapter 4 Long-Term
22. ,hich of the following is >:T a determinant of the s!stainable growth rateH
"? 3nven
ventor
tor( t!rnover
$? Profit margin
C? /ebt-e6!it ( ratio
/? Total
tal as
asset t!
t!rnover
=? /ivid
ivideend pa(o
a(o!t ratio
tio
"ns# " Level# 3ntermediate %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Concepts
25. The s!stainable

s!stainable growth
growth rate depends
depends on all of the following =C=PT =C=PT
"? The
The fir
firm
mss abi
abilit
lit(
( to
to t!r
t!rnn sale
saless into
into inc
income
ome
$? The firms
firms pro&ec
pro&ection
tionss of
of e8pect
e8pected ed divide
dividendnd pa(o!ts
pa(o!ts
C? The degree
degree of financ
financial
ial levera
leveragege a firm
firm e8pect
e8pectss to !tilie
!tilie
/? The
The leve
levell of new
new asse
assets
ts re6
re6!i!ire
red
d as
as sale
saless grow
grow
=? The
The firm
firmss ratio
ratio of
of acco
acco!n!ntsts rec
recei
eiva
vable
ble to
to inve
invent
ntor(
or(

T(pe# Concepts
27. The determinants

determinants of growth
growth incl!de which
which of the followingH
followingH
3. =6!it( m!ltiplier
33. Profit margin
333. Total
Total asset t!rnover
t!rnover
"? 3 onl(
$? 33 onl(
C? 33 and 333 onl(
/? 3 and 333
=? 3+ 33+ and 333
"ns# = Level# 3ntermediate %!b&ect# Growth Factors T(pe#

T(pe# Concepts
59. "ll else the same+ an increase in a firms dividend pa(o!t ratio will decrease
decrease its#
3. %!stainable growth rate.
33. 3nternal growth rate.
333. =8ternal financing
financing needed.
needed.
"? 3 onl(
$? 33 onl(
C? 3 and 33 onl(
/? 3 and 333 onl(
=? 33 and 333 onl(
"ns# C Level# 3ntermediate %!b&ect# Growth <ates T(pe#

T(pe# Concepts
Cop(right ; )99 'cGraw-ill <(erson Limited. Page 1

Chapter 4 Long-Term
51. 3f a firm believes its costs and assets grow at the same
same rate as sales+ the dividend pa(o!t
pa(o!t ratio is fi8ed+ no
new e6!it( is possible+ and the c!rrent debt-e6!it( ratio is optimal+ then which of the following is tr!eH
3. The s!stainable growth rate rate gives the ma8im!m rate at which sales can grow.
33. =8ternal financing will be ero.
ero.
333. "sset growth m!st completel( come from increases in acco!nts pa(able and retained earnings.
earnings.
3. 3f the firm pa(s o!t in dividends all of its net income+ sales cannot grow.
"? 3 onl(
$? 3+ 33+ and 333 onl (
C? 3 and 3 onl(
/? 33+ 33
333+ an
and 3
3 onl (
=? 3+ 33+ 333+ an
and 3
"ns# C Level# 3ntermediate %!b&ect# %!stainable Growth T(pe#

T(pe# Concepts
5). 3f a firm is to grow at its s!stainable growth rate+ its growth depends on which of the following factorsH
factorsH
3. Profit margin
33. Financial polic(
333. /ividend polic(
"? 3 onl(
$? 3 and 33 onl(
C? 3 and 333 onl(
/? 33 and 333 onl(
=? 3+ 33+ and 333

T(pe# Concepts
5*. ,hich of the following firms wo!ld most likel( be interested in in knowing their s!stainable
s!stainable growth rateH
"? " firm
firm that
that belie
believes
ves its e6!it
e6!it( ( m!ltip
m!ltiplie
lierr is at
at its optimal
optimal leve
levell
$? " firm
firm that
that has
has no capa
capaci
cit(
t( to
to rai
raise
se new
new debt
debt
C? " firm
firm in
in a mat!r
mat!ree ind!st
ind!str(
r( that
that e8pec
e8pectsts limite
limited d sales
sales grow
growthth in the
the f!t!r
f!t!ree
/? " firm
firm that
that pa(
pa(s no
no divi
divide
dend
ndss
=? " firm
firm that
that has
has a low
low leve
levell of investme
investment nt in
in fi8e
fi8edd asse
assets
ts
"ns# " Level# 3ntermediate %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Concepts
54. Mo!
Mo! wish to comp!te a firms s!stainable growth rate from its acco!nting statements. To do so+ (o! co!ld
!se the val!es of
"? tota
totall asse
assets+
ts+ net
net inc
incomome+e+ and
and the
the ret
reten
entio
tion
n ratio
ratio
$? tota
totall ass
asset
ets+
s+ inter
interes
estt pai
paid+
d+ and
and e6!
e6!it(
it(
C? net
net incom
income+ e+ e6!
e6!it(
it(++ and
and the
the div
divide
idend
nd pa(
pa(o!
o!tt ratio
ratio
/? inte
intere
rest
st paid
paid++ e6!
e6!it(
it(++ and
and total
total asse
assets
ts
=? net
net inco
incomeme++ e6!
e6!it
it(
(+ and
and tot
total
al asse
assetsts
"ns# C Level# $asic %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Concepts

Chapter 4 Long-Term
5. ,hich of the following are constant !nder the percentage

percentage of sales approachH
"? Prof
Profit
it marg
margin in and
and div
divide
idend
nd pa(o!
pa(o!tt rat
ratio
io
$? "ddi
"dditio
tionn to
to ret
retai
aine
nedd ear
earni
ning
ngss and
and net
net inco
income
me
C? /ivi
/ivide
dendndss pai
paidd and
and the
the pro
profi
fitt marg
margin
in
/? Costs
Costs as a perperce
cent
ntag
agee of sal
sales
es and
and div
divide
idend
ndss paid
paid
=? Costs
Costs asas a perce
percenta
ntage
ge of
of sales
sales and the additio
additionn to reta
retaine
ined
d earni
earnings
ngs
"ns# " Level# 3ntermediate %!b&ect# Percentage :f %ales "pproach T(pe#

T(pe# Concepts
50. The elements

elements of financial
financial planning
planning incl!de#
incl!de#
3 The res!lts of the net working capital decisions.
33 Consideration of the degree of financial leverage to be emplo(ed.
333 3nvestment opport!nities the firm chooses to p!rs!e.
3 The amo!nt of cash needed to pa( dividends.
"? 3 and 3 onl(.
$? 3+ 33
33+ an
and 33333 onl (.
(.
C? 33+ 333+ an
and 3 onl(. l(.
/? 3+ 333+ and 3 onl(. l(.
=? 3+ 33+ 333+ an
and 3.
"ns# = Level# 3ntermediate %!b&ect# =lements :f Financial Planning T(pe#

T(pe# Concepts
52. Financial
Financial planning genera
generall(
ll( considers#
considers#
"? Two to five
five prop
proposa
osals
ls ove
overr the
the shor
short-
t-te
term
rm..
$? " two
two to five
five (ear
(ear time
time frame
frame while
while aggr
aggrega
egating
ting smalle
smallerr propo
proposal
sals.
s.
C? The details
details of each
each indiv
individ!a
id!all pro&ec
pro&ectt over
over the long-t
long-term
erm..
/? Thre
Threee alter
alterna
nativ
tivee scena
scenaririos
os over
over the
the short
short-t
-ter
erm.
m.
=? "n aggreg
aggregati
ation
on of pro&ec
pro&ectsts over
over the ne8t
ne8t twent(
twent(-fo
-fo!r
!r mon
months
ths..
"ns# $ Level# 3ntermediate %!b&ect# Planning orion T(pe#

T(pe# Concepts
55. Financial
Financial planning
planning allows
allows firms
firms to#
3. "void
"void f!t!re losses.
33. /evelop contingenc( plans.
333. "scertain e8pected financing needs.
3. =8plore and eval!ate vario!s options.
"? 3 and 3 onl(.
$? 333 and 3 onl(.
C? 33 and 333 onl(.
/? 33+ 33
333+ an
and 3
3 onl(.
l(.
=? 3+ 33+ 333+ an
and 3.
"ns# / Level# 3ntermediate %!b&ect# Financial Planning T(pe#

T(pe# Concepts
57. The sales foreca

forecast
st for most financia
financiall plans is#
"? /evelo
/eveloped
ped base
basedd !pon
!pon the netnet incom
incomee fig!re
fig!re provide
providedd b( manag
manageme
ement.
nt.
$? Pro&ec
Pro&ected
ted based
based on the
the antic
anticipa
ipated
ted level
level ofof debt
debt fina
financi
ncing.
ng.
C? sed as
as th
the pl
pl!g fi
fig!re
!re.
/? /erive
/erived d from
from the
the o!tp
o!tp!t!t of
of the
the finan
financia
ciall plann
planning
ing proce
process.
ss.
=? =8te
8ternall(
ll( s!pplied
ied.
"ns# = Level# $asic %!b&ect# %ales Forecast T(pe#

T(pe# Concepts

Chapter 4 Long-Term
79. Two of the more important economic factors that m!st be considered when doing a financial plan for a firm
firm
are the#
"? G/P
G/P grow
growthth rate
rate and
and the
the inte
intere
rest
st rate.
rate.
$? nem
nempl plo(
o(me
mentnt rate
rate and
and the
the G/P
G/P growgrowthth rate.
rate.
C? 'arg
'argininal
al ta8
ta8 rat
ratee and
and the
the inte
intere
rest
st rate
rate..
/? G/P
G/P grogrowt
wthh rate
rate and
and the
the marg
marginainall ta8
ta8 rate
rate..
=? 3nfl
3nflat
atio
ionn rat
ratee and
and the
the inte
intere
rest
st rat
rate.
e.
"ns# C Level# 3ntermediate %!b&ect# =conomic "ss!mptions T(pe#

T(pe# Concepts
71. 3ncreasing all acco!nts b( a fi8ed percentage ma( not be the best financial planning model beca!se#
beca!se#
"? The
The deb
debt-
t-e6
e6!i!it(
t( rat
ratio
io wo!
wo!ld ld var(
var(..
$? >ot
>ot all
all acc
acco!
o!nt
ntss var
var(( dir
direc
ectl(
tl( with
with sal
sales
es..
C? The
The mo
modedell is diff
diffic
ic!l
!ltt to !se.
!se.
/? The
The grow
growthth per
perce
centa
ntage
ge isis diff
diffic
ic!l
!ltt to pre
predi
dict
ct..
=? The
The ret
reten
entio
tionn rat
ratio
io m!st
m!st be heldheld cons
consta tant
nt..
"ns# $ Level# 3ntermediate %!b&ect# Financial Planning 'odel T(pe#

T(pe# Concepts
7). 3f a firm lowers

lowers its dividend
dividend pa(o!t ratio+ ratio+ then the firms#
firms#
"? <ete
<etentntio
ionn rat
ratio
io will
will decr
decreaease
se..
$? /ivi
/ividedend
ndss per
per shar
sharee will
will inc
incre
reas ase.
e.
C? >et
>et inc
incom
omee wil
willl inc
increa
rease.
se.
/? %!sta
%!staininab
able
le grow
growth th rate
rate will
will inc
increreas
ase.
e.
=? 3nte
3ntern
rnal
al grow
growthth rat
ratee wil
willl decr
decreaease
se..
"ns# / Level# 3ntermediate %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Concepts
7*. ,hich one of the following ass!mptions applies to a worst case scenarioH
scenarioH
"? %ales
%ales are pro&ec
pro&ectedted !sing
!sing the highes
highestt e8pec
e8pected
ted val!e.
val!e.
$? The
The mos
mostt like
likel(l( lev
level
el of sale
saless is
is !se
!sed.
d.
C? The
The bes
bestt eco
econonomic
mic ass!
ass!mp
mptio
tions
ns are
are mad
made.
e.
/? The
The high
highesestt leve
levell of e8pa
e8pans
nsion
ion is ass
ass!me
!med.
d.
=? Costs
Costs are pro&ec
pro&ected
ted !sing
!sing the highes
highestt e8pe
e8pecte
cted
d val!
val!e.
e.
"ns# = Level# 3ntermediate %!b&ect# ,orst

,orst Case %cenario T(pe#
T(pe# Concepts
74. ,hich one of the following is the ke( driver of most financial plansH
"? >et income target
$? %ales forecast
C? "vaila
ailabl
blee net
net wor
worki
king
ng capi
capita
tall
/? Cost of goods sold
=? <et!rn on e6!it(
"ns# $ Level# 3ntermediate %!b&ect# Financial Planning Process T(pe#

T(pe# Concepts

Chapter 4 Long-Term
7. ,hich one of the following statements is correct concerning the capital intensit( ratioH
"? The capi
capital
tal inten
intensit(
sit( ratio
ratio is
is the reci
recipro
procal
cal of
of the tota
totall asset
asset t!rnove
t!rnoverr ratio.
ratio.
$? The capita
capitall intensit(
intensit( ratio provides
provides thethe amo!nt
amo!nt of sales
sales genera
generated
ted for
for each
each B1
B1 in total
total assets
assets..
C? The highe
higherr the capi
capital
tal inten
intensit(
sit( rati
ratio+
o+ the less
less emph
emphasi
asiss the firm
firm p!ts
p!ts on capi
capital
tal..
/? The capi
capital
tal inten
intensit(
sit( ratio
ratio is !sed
!sed toto comp!
comp!tete the
the intern
internalal rate
rate of grow
growth.
th.
=? The capita
capitall intensi
intensit(
t( ratio
ratio relate
relatess the amo!n
amo!ntt of c!rren
c!rrentt assets
assets to long-
long-ter
termm assets.
assets.
"ns# " Level# 3ntermediate %!b&ect# Capital 3ntensit( <atio T(pe#

T(pe# Concepts
70. ,hich of the following

following tend
tend to var( directl(
directl( with salesH
salesH
3 3nventor(
33 "cco!nts pa(able
333 Long-term debt
3 >otes pa(able
"? 3 and 33 onl(
$? 333 and 3 onl(
C? 3+ 33+ and 3 onl(
/? 3+ 33+ and 333 onl (
=? 3+ 33+ 333+ an
and 3
"ns# " Level# 3ntermediate %!b&ect# Percentage :f %ales 'ethod T(pe#

T(pe# Concepts
72. ,hich one of the following statements is tr!e if a firm is operating at

at less than f!ll
f!ll capacit(H
"? The =F>
=F> comp!t
comp!teded !sing
!sing the
the straig
straight
ht perce
percentag
ntagee method
method will
will be !nde
!nderst
rstate
ated.d.
$? The =F>
=F> comp!t
comp!teded !sing
!sing the
the strai
straight
ght perc
percenta
entage
ge metho
methodd will
will be acc!r
acc!rate
ate..
C? The =F>
=F> comp!t
comp!teded !sing
!sing the
the percen
percentage
tage of
of sales
sales appro
approach
ach will
will be !nde
!nderst
rstate
ated.
d.
/? The =F>
=F> comp!t
comp!teded !sing
!sing the
the percen
percentage
tage of
of sales
sales appro
approach
ach will
will be acc!
acc!rat
rate.
e.
=? The =F>
=F> comp!t
comp!teded !sing
!sing the
the perce
percentag
ntagee of sale
saless appro
approach
ach will
will be
be overst
overstate
ated.d.
"ns# = Level# 3ntermediate %!b&ect# =fn "nd F!ll Capacit( T(pe#

T(pe# Concepts
75. ,hich one of the following statements is correct concerning the e8ternal financing need @=F>? and the
dividend pa(o!t ratioH "ss!me =F> is a positive n!mber.
"? The
The divi
divide
dend
nd pa(
pa(o!
o!tt ratio
ratio has
has no eff
effec
ectt on the
the =F>
=F>..
$? "n incr
increas
easee in the divide
dividend
nd pa(o
pa(o!t!t ratio
ratio will decrea
decrease
se the
the =F>.
=F>.
C? "n incr
increas
easee in the divide
dividend
nd pa(o
pa(o!t!t ratio
ratio will increa
increase
se the
the =F>.
=F>.
/? The effe
effect
ct on =F> ca!sed
ca!sed b( an an increase
increase in the dividend
dividend pa(o!t
pa(o!t ratio can not
not be predicted.
predicted.
=? "n incr
increas
easee in =F> ca!ses
ca!ses the divide
dividend
nd pa(o
pa(o!t
!t ratio
ratio to decr
decreas
ease.
e.
"ns# C Level# 3ntermediate %!b&ect# =fn "nd /ividend Pa(o!t <atio T(pe#
T(pe# Concepts
77. The e8ternal financing

financing need tends to AAAAAA as the pro&ected growth rate
rate in sales increases.
increases.
"? decrease
$? increase
C? remain constant
/? var(
var( in an !npr
!npred
edic
icta
tabl
blee man
manne
ner
r
=? incr
increa
easse an
and the
then
n dec
decrreas
ease
"ns# $ Level# 3ntermediate %!b&ect# =F> "nd Growth <ates T(pe#

T(pe# Concepts

Chapter 4 Long-Term
199. Financial
Financial planning
planning foc!ses
foc!ses on#
"? The individ
individ!al!al compon
component entss o
off the
the financ
financial
ial polic(
polic(..
$? The ma&or
ma&or elem
element
entss of the financ
financialial and invest
investmen
mentt polic
policies
ies..
C? "ntic
"nticipa
ipateted
d cha
chang
nges
es onl(
onl( in the shor
short-r
t-r!n
!n..
/? The
The inco
incomeme sta
state
temen
mentt b!t
b!t not
not the
the bala
balanc
ncee shee
sheet.
t.
=? Capi
Capita
tall str!
str!ct
ct!r
!ree and
and div
divide
idend
nd pol
polic(
ic( onl(
onl(..

T(pe# Concepts
191. $eca!se Nerr(s 3ce Cream is c!rrentl( prod!cing

prod!cing at less than f!ll capacit(+
capacit(+ the pro-forma for ne8t (ear
sho!ld pro&ect#
"? " decrease in salesles.
$? " net loss.
C? " decr
decrea
ease
se in net
net wor
workiking
ng capi
capita
tal.
l.
/? Fi8e
Fi8edd ass
asset
etss gro
growin
wing g slow
slowerer than
than sale
sales.
s.
=? " nega
negatitive
ve plow
plowbaback
ck ratio
atio..
"ns# / Level# 3ntermediate %!b&ect# Capacit( "nd Growth T(pe#

T(pe# Concepts
19). " firms

firms abilit( to s!stain growth
growth depends
depends !pon the#
3. Profit margin.
33. /ividend polic(.
333. Total
Total asset t!rnover.
3. Financial
Financi al polic(.
polic (.
"? 3 and 33 onl(.
$? 333 and 3 onl(.
C? 33+ 333+ an
and 3 onl(. l(.
/? 3+ 333+ and 3 onl(.l(.
=? 3+ 33+ 333+ an
and 3.
"ns# = Level# 3ntermediate %!b&ect# Growth Factors T(pe#

T(pe# Concepts
19*.. Financi
19* Financial
al planning#
planning#
"? 3s a static model.
$? %ho!
%ho!ldld be a p!r
p!rel(
el( acco
acco!n
!ntin
tingg pro
proce
ced!
d!rere..
C? 3s an iter
iteraative
tive proc
proceess
ss..
/? Foc!ses on on ne
net in
income.
=? Conc
Concenentr
trat
ates
es on the
the pres
presen
entt ope
opera
ratio
tions
ns..
"ns# C Level# $asic %!b&ect# Financial Planning T(pe#

T(pe# Concepts
194. The s!stainable

s!stainable growth
growth rate rises
rises as the AAAAAAA declines.
declines.
"? Profit ma
margin
$? <etention ratio
C? /ebt-e6!it ( ratio
/? /ivid
ivideend pa(
pa(oo!t ra
ratio
tio
=? Total
tal asset t!rnover
"ns# / Level# 3ntermediate %!b&ect# Growth <ate T(pe#

T(pe# Concepts
Cop(right ; )99 'cGraw-ill <(erson Limited. Page )9

Chapter 4 Long-Term
19. Given the following information#sales O B49I costs O B499I ta8 rate O *4K. "ss!ming costs r!n at a
constant percentage of sales+ if sales rise b ( 19K ne8t (ear+ what will net income beH
"? B*.*9
$? B**.99
C? B*0.*9
/? B140.99
=? B172.))
"ns# C Level# $asic %!b&ect# Percentage :f %ales T(pe#

T(pe# Problems
190. " firm earns

earns net income of B)+999 in a given (ear and the firms
firms retained earnings increase B1+999
B1+999 for
that same (ear.
(ear. The retention ratio is#
"? )K
$? 49K
C? 09K
/? 2K
=? 199K
"ns# C Level# $asic %!b&ect# <etention <atio T(pe#

T(pe# Problems
192. Given the following information# sales

sales O B49+ costs O B*9+ ta8 rate O *4K+ retention ratio
ratio O *9K+
prod!ction O 7K of capacit(+ sales increase O 19K. ,hat is the e8pected addition to retained earningsH
@"ss!me costs change directl( with sales.?
"? B1.75
$? B11.))
C? B17.59
/? B)1.25
=? B9.5)
"ns# / Level# 3ntermediate %!b&ect# <etained =arnings T(pe#

T(pe# Problems
195. Pick!p 3nd!stries has

has a profit margin of 1K and a dividend pa(o!t
pa(o!t of 49K. Last (ears sales
sales were B099
million and total assets were B499 million. >one of the liabilities var( directl( with sales+ b!t assets and
costs do. 3f the sales growth rate for Pick!p is )9K+ how m!ch e8ternal financing is neededH
neededH
"? B.) million
$? B1*.1 million
C? B1.) million
/? B)1.* million
=? B)0.9 million
"ns# C Level# 3ntermediate %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Problems

Chapter 4 Long-Term
197. Given the following information# assets O B799I

B799I acco!nts pa(able O B119I
B119I notes pa(able O B199I long-term
long-term
debt O B19I e6!it( O B49I sales O B49I costs O B499I ta8 rate O *4KI dividends O B10. 9. Costs+ assets+
and acco!nts pa(able maintain a constant
constant ratio to sales. ow m!ch e8ternal financing is needed
needed if sales
increase 1K and the dividend pa(o!t ratio is constantH
"? B51
$? B74
C? B199
/? B190
=? B1))
"ns# C Level# Challenge %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Problems
119. %!ppose a firm has net income of B199 and a profit margin
margin e6!al to 14K. 3f the firm is working at )E*
)E*
capacit(+ then f!ll capacit( sales are#
"? B420
$? B*7
C? B214
/? B 5)*
=? B1+921
"ns# = Level# 3ntermediate %!b&ect# F!ll Capacit( %ales T(pe#

T(pe# Problems
111.. n!dsen+ 3nc. s firms

111 firms f!ll-capacit( sales level is B*+999+999. 3f the firm is c!rrentl( operating
operating at 59K of
capacit(+ what is the c!rrent level of salesH
"? B099+999
$? B1+99+999
C? B1+29+999
/? B)+499+999
=? B*+29+999
"ns# / Level# 3ntermediate %!b&ect# F!ll Capacit( %ales T(pe#

T(pe# Problems
11). Given the following information# c!rrent assets O B499I fi8ed assets O B99I acco!nts pa(able O B199I
B199I
notes pa(able O B4I long-term debt O B4I e6!it( O B*99I sales O B49I costs O B499I ta8 rate O *4K.
%!ppose that c!rrent assets+ costs+
costs+ and acco!nts pa(able maintain a constant ratio to sales. 3f the firm is
prod!cing at 59K capacit(+ what
what is the total e8ternal financing needed if sales increase )KH "ss!me
"ss!me the
firm pa(s no dividends.
"? B**.2
$? B00.)
C? B14*.2
/? B12).9
=? B*59.)
"ns# " Level# 3ntermediate %!b&ect# =8cess Capacit( Q =8ternal... T(pe#

T(pe# Problems
Cop(right ; )99 'cGraw-ill <(erson Limited. Page ))

Chapter 4 Long-Term
11*. 'oore 'one( 3nc hashas a profit margin of 11K and a retention ratio of 29K. Last (ear+ the firm had sales of
B99 and total assets of B1+999. ,hat is the internal growth rateH
rateH
"? 1.2K
$? ).0K
C? *.2K
/? 4.9K
=? .7K
"ns# / Level# 3ntermediate %!b&ect# 3nternal Growth <ate T(pe#

T(pe# Problems
114. Given the following information# profit margin O 19KI sales O B199I retention
retention ratio O 49KI assets O B)99I
B)99I
e6!it( m!ltiplier O ).9. 3f the firm maintains a constant
constant debt-e6!it( ratio and no new e6!it(
e6!it( is !sed+ what is
the ma8im!m growth rateH
rateH @"ss!me a constant
constant profit margin.?
"? ).94K
$? ).*4K
C? *.05K
/? 4.12K
=? .7*K

T(pe# Problems
11. %impl( <ed+ 3nc. has a ret!rn on e6!it( of 14K+

14K+ a dividend pa(o!t
pa(o!t ratio of )9K+ an e6!it( m!ltiplier of
1.4+ and a profit margin of 1.)K. ,hat is the s!stainable growth rateH
rateH
"? ).9K
$? ).7K
C? .*K
/? 5.2K
=? 1).0K

T(pe# Problems
110. 'oore 'one( 3nc hashas a profit margin of 11K and a retention ratio of 29K. Last (ear+ the firm had sales of
B99 and total assets
assets of B1+999. The desired total debt ratio is 2K.
2K. ,hat is the firms s!stainable growth
rateH
"? ).K
$? 4.9K
C? 2. 1K
/? 11.*K
=? 15.)K

T(pe# Problems
112. %!ppose a firm has net

net income of B9+ dividends of B1+ assets
assets of B1+)99 and a debt-e6!it(
debt-e6!it( ratio of *.9.
,hat is the s!stainable growth rateH
"? 1.K
$? 4.9K
C? 7.0K
/? 1*.)K
=? 15.1K
"ns# / Level# 3ntermediate %!b&ect# %!stainable Growth T(pe#

T(pe# Problems
Cop(right ; )99 'cGraw-ill <(erson Limited. Page )*

Chapter 4 Long-Term
115. "ss!me a firm has sales of B4+29 on assets totaling B)+99+ net income of B*2+ and dividends of B19.
,hat is the s!stainable growth rate if the e6!it( has a val!e of B1+99H
"? )).7K
$? 12.0K
C? 1*.9K
/? 11.1K
=? 7.7K
"ns# $ Level# 3ntermediate %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Problems
se the following to answer 6!estions 117-1)1#
>et income O B19I Total

Total assets O B1+999I Total
Total liabilities O B499I Total asset t!rnover O 4. 9
117. ,hat is the capital intensit( ratio

ratio ass!ming dividends paid total B199H
B199H
"? 9.99
$? 9.)
C? 9.9
/? ).99
=? 4.99
"ns# $ Level# 3ntermediate %!b&ect# Capital 3ntensit( <atio T(pe#

T(pe# Problems
1)9. ,hat is the internal growth rate ass!ming dividends paid total B199H
"? 1.1K
$? ).K
C? .*K
/? 5.*K
=? 7.1K
"ns# C Level# 3ntermediate %!b&ect# 3nternal Growth <ate T(pe#

T(pe# Problems
1)1. ,hat is the s!stainable growth rate ass!ming dividends paid total B9H
"? ).K
$? .*K
C? 5.*K
/? 7.1K
=? 11.11K

T(pe# Problems

Chapter 4 Long-Term
se the following to answer 6!estions 1))-1)#
%tone <oses Co.

$alance %heet
Cash B 9 "cco!nts pa(able B199
3nventor( B19 >otes pa(able 1 99
Fi8ed assets B099 Long-term debt *9
=6!it( )9
Total assets B599 Total liabilities Q e6!it( B599
%tone <oses Co.

3ncome statement
%ales B 59 9
Costs 09 9
=$T B)99
Ta8es @*4K? 05
>et income B1*)
1)). %!ppose that c!rrent assets+ costs+ and acco!nts pa(able maintain a constant
constant ratio to sales. The firm retains
49K of earnings. 3f the firm is prod!cing at onl( 79K capacit(+ what is the total e8ternal financing needed
if sales increase )KH
"? B1
$? B*4
C? B41
/? B42
=? B7 4
"ns# $ Level# Challenge %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Problems
1)*. %!ppose the firm retains )5K of earnings+ while assets

assets and costs maintain
maintain a constant percentage
percentage of sales.
sales. 3f
the firm is prod!cing at f!ll capacit(+ what is the internal growth rateH
"? 1.7K
$? 4.5K
C? 19.1K
/? 1*.K
=? 12.*K
"ns# $ Level# Challenge %!b&ect# 3nternal Growth <ate T(pe#

T(pe# Problems
1)4. %!ppose that assets and costs maintain a constant ratio to sales. The firm retains *9K of earnings.
earnings. 3f the
firm is prod!cing at f!ll capacit(+ what is the ma8im!m growth rate+ ass!ming no e6!it( sales+ that will
maintain a constant debt-e6!it( ratioH
"? .)K
$? 1.0K
C? 15.5K
/? )1.9K
=? )7.)K
"ns# C Level# Challenge %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Problems
Cop(right ; )99 'cGraw-ill <(erson Limited. Page )

Chapter 4 Long-Term
1). %!ppose the firm wishes to maintain a constant

constant debt-e6!it( ratio+ retains 09K of net income+ and raises no
new e6!it(. "ssets and costs maintain a constant ratio to sales.
sales. ,hat is the ma8im!m increase in sales the
firm can achieveH
"? B55
$? B)47
C? B*21
/? B4)7
=? B59
"ns# C Level# Challenge %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Problems
se the following to answer 6!estions 1)0-1*)#
%tansfield Corporation
3ncome %tatement
@B in millions?
%ales B*99
Costs )9
=$T B 9
Ta8es @*4K? 12
>et income B **
<etained earnings B ))
/ividends B 11
%tansfield Corporation
$alance %heet
@B in millions?
Cash B "cco!nts pa(able B 49
"cco!nts receivables 49 >otes pa(able *9
3nventor( 0 C!rrent liabilities B 29
C!rrent assets B119 Long-term debt 1
>et plant Q e6!ip. )79 Common stock 2
<etained earnings 199
Total assets B 4 99 Total liab. Q e6!it( B 49 9
1)0. "ss!ming a constant profit

profit margin+ what will %tansfield Corporations net
net income be if sales increase b(
19KH
"? B**.9 million
$? B*4. million
C? B*0.* million
/? B*7.0 million
=? B09.9 million
"ns# C Level# Challenge %!b&ect# Percentage :f %ales T(pe#

T(pe# Problems

Chapter 4 Long-Term
1)2. ,hat is %tansfield Corporations addition to retained

retained earnings with a 19K increase
increase in salesH "ss!me
"ss!me the
dividend pa(o!t ratio and profit m argin remain fi8ed.
"? B)).9 million
$? B)4.) million
C? B)0.4 million
/? B)7.2 million
=? B*7.9 million
"ns# $ Level# Challenge %!b&ect# <etained =arnings T(pe#

T(pe# Problems
1)5. "ss!me %tansfield Corporation

Corporation is operating at
at f!ll capacit(.
capacit(. ,hat will total assets be if sales increase b(
19KH "ss!me costs+ c!rrent liabilities+ and c!rrent assets var( directl( with sales and that the divi dend
pa(o!t ratio remains !nchanged.
"? B)).9 million
$? B)*1.0 mimillion
C? B)40.2 mimillion
/? B**9. million
=? B449.9 million
"ns# = Level# Challenge %!b&ect# Total

Total "ssets T(pe#
T(pe# Problems
1)7. "ss!me %tansfield Corporation is !tiliing its fi8ed assets at 79K capacit(.
capacit(. "ss!me costs+
costs+ c!rrent
liabilities+ and c!rrent assets var( directl( with sales+ and that the dividend pa(o!t ratio remains !nchanged.
3f sales increase b( )9K+ what will total fi8ed assets beH
"? B)0 million
$? B)50 million
C? B*1* million
/? B*7 million
=? B429 million
"ns# C Level# Challenge %!b&ect# F!ll Capacit( %ales T(pe#

T(pe# Problems
1*9. ow m!ch e8ternal financing is needed

needed for a )9K increase
increase in sales if the Corporation
Corporation is c!rrentl( operating
at f!ll capacit(H "ss!me assets and costs var( directl( with sales b!t no c!rrent liabilities increase with
sales and that the dividend pa(o!t ratio remains fi8ed.
"? B9
$? B)*.) million
C? B)2.0 million
/? B*2.4 million
=? B*.0 million
"ns# = Level# Challenge %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Problems
1*1. ,hat is the addition

addition to retained earnings if %tansfield grows at the internal growth rateH @"ss!me the
dividend pa(o!t ratio is fi8ed.?
"? B.5 million
$? B1*.* million
C? B)*.* million
/? B)4.7 million
=? B**.9 million
"ns# C Level# Challenge %!b&ect# 3nternal Growth <ate T(pe#

T(pe# Problems

Chapter 4 Long-Term
1*). ,hat is %tansfield Corporations addition to total assets if the( grow at the s!stainable
s!stainable growth rateH
@"ss!me the dividend pa(o!t ratio is fi8ed.?
"? B1 million
$? B)* million
C? B*) million
/? B44 million
=? B5 million
"ns# = Level# Challenge %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Problems
se the following to answer 6!estions 1**-141#
'arble Comics Gro!p

$alance %heet for Mears
Mears =nding )99) and )99*
@B in millions?
)99) )99* ) 99 ) )9 9*
Cash B 2 B 1* "cco!nts pa(able B 57 B119

"cco!nts receivable )*9 )14 >otes pa(able ))2 4 4)
3nventor( )49 155 C!rrent liabilities * 10  )
C!rrent assets 4 *2 Long-term debt 01 449
Fi8ed assets 255 579 Common stock  
<etained earnings *42 *59
Total assets B1+*** B1+4)2 Total liab. Q e6!it( B1+*** B1+4)2
'arble Comics Gro!p

)99* 3ncome %tatement
@B in millions?
>et sales B79
Less# Cost of goods sold ))
Less# General Q adm. e8penses 7*
Less# /epreciation 119
=arnings before interest and ta8es 159
Less# 3nterest paid 01
=arnings before ta8es 117
Less# Ta8es *9
>et income B 57
1**. ,hat is 'arbles

'arbles earnings
earnings retention
retention ratio for )99*H
)99*H
"? 9.*2
$? 9.47
C? 9.0*
/? 9.57
=? 9.7)
"ns# C Level# $asic %!b&ect# <etention <atio T(pe#

T(pe# Problems

Chapter 4 Long-Term
1*4. %!ppose 'arble is pro&ecting a )9K increase in sales for the coming (ear+
(ear+ and that cost of goods
goods sold and
generalEadministrative e8penses remain a constant percentage of sales. "lso ass!me that depreciation+
interest paid+ and the firms ta8 rate remain
remain !nchanged. ,hat will the firm pa( o!t in dividends in )994H
"ss!me the firms dividend pa(o!t is 49K.
"? B*9
$? B*)
C? B45
/? B*
=? B0 2
"ns# / Level# 3ntermediate %!b&ect# /ividends T(pe#

T(pe# Problems
1*. $ased on the )99* data+

data+ what is 'arbles capital
capital intensit(
intensit( ratioH
"? 1.)9
$? 1.)*
C? 1.*
/? 1.42
=? 1.5
"ns# = Level# $asic %!b&ect# Capital 3ntensit( T(pe#

T(pe# Problems
1*0. %!ppose 'arble

'arble is c!rrentl(
c!rrentl( operating at 29K of capacit(. ,hat are f!ll capacit( salesH
salesH
"? B)21
$? B0**
C? B750
/? B1+)7*
=? B*+912
"ns# / Level# 3ntermediate %!b&ect# F!ll Capacit( %ales T(pe#

T(pe# Problems
1*2. "ss!me 'arble is pro&ecting a )9K )9K increase in sales for

for the coming (ear+ and that assets+ all costs+ and
c!rrent liabilities are proportional
proportional to sales. Long-term debt is not proportional to sales.
sales. "ss!me the firms
ta8 rate remains !nchanged and the dividend pa(o!t is 49K. ,hat is the e8ternal financing needed needed @=F>?
for )994H
"? B04.1
$? B119.7
C? B1*).*
/? B140.2
=? B1).7

T(pe# Problems

Chapter 4 Long-Term
1*5. "ss!me 'arble is pro&ecting a )9K )9K increase in sales for

for the coming (ear+ with c!rrent assets+ all costs+ and
c!rrent liabilities proportional to sales. Long-term debt is not proportional to sales. 3f the firms ta8 rate
remains !nchanged+ the dividend pa(o!t is 49K+ and 'arble is operating at 29K of capacit(+ what is the
e8ternal financing needed @=F>? for )994H
"? =F> is negative
$? B)1.74
C? B45.*1
/? B20.*)
=? B57.5
"ns# " Level# Challenge %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Problems
1*7. ,hich of the following describes the components of 'arbles

'arbles )99* <:= from the /! Pont
Pont identit(H
"? .975I .0
.0*4I *.
*.)5
$? .975I .027I *.)5
C? .975I .027I *.90
/? .975I .0
.0*4I *.
*.90
=? .975I .027I *.20
"ns# " Level# 3ntermediate %!b&ect# /eterminants :f Growth T(pe#

T(pe# Problems
149. $ased on the )99* financial statement data+

data+ 'arbles internal growth rate is AAAAAA.
AAAAAA. @"ss!me the dividend
pa(o!t ratio is fi8ed.?
"? ).4K
$? ).K
C? 4.1K
/? 5.)K
=? 7.K
"ns# " Level# 3ntermediate %!b&ect# 3nternal Growth <ate T(pe#

T(pe# Problems
141. $ased on the )99* financial statement data+

data+ 'arbles s!stainable growth rate is AAAAAAA. @"ss!me the
dividend pa(o!t ratio is fi8ed.?
"? ).4K
$? ).K
C? 4.1K
/? 5.)K
=? 7.K

T(pe# Problems
se the following to answer 6!estions 14)-144#
C!rrent "ssets B199 "ccts. Pa(. B9 %ales B1+999

>et Fi8ed ". B)99 Long term debt B199 Costs B599
=6!it( B19 Ta8able income B)99
Total "ssets B*99 Total LQ= B*99 Ta8es B05
>e
>et 3ncome B1*)
Cop(right ; )99 'cGraw-ill <(erson Limited. Page *9

Chapter 4 Long-Term
14). "ss!me costs+ assets+ and acco!nts pa(able all increase at the same
same rate as
as sales. "lso ass!me
ass!me 59K of
of net
income is paid o!t
o!t in dividends. 3f sales grow
grow at )K+ comp!te e8ternal financing needed.
needed.
"? B9.99
$? B4.9
C? B)).9
/? B)7.9
=? B).99
"ns# / Level# Challenge %!b&ect# =8ternal Financing >eeded T(pe#

T(pe# Problems
14*. "ss!me costs+ acco!nts pa(able+ and c!rrent assets all increase at the same rate as sales. "lso ass!me
ass!me 59K
of net income is paid o!t in dividends and that the firm is c!rrentl( operating
operating at 79K of capacit(.
capacit(. 3f sales
grow at )K+ comp!te e8ternal financing needed.
"? B9.99
$? B4.9
C? B)).9
/? B)7.9
=? B).99

T(pe# Problems
144. "ss!me costs and assets increase at the same rate

rate as sales. "lso ass!me
ass!me 49K of net income is paid
paid o!t in
dividends. ,hat is the ma8im!m growth rate achievable ass!ming no e8ternal debt or e6!it( is availableH
"? 11.)K
$? ).4K
C? *.5K
/? 1.0K
=? 111.5K
"ns# C Level# Challenge %!b&ect# 3nternal Growth <ate T(pe#

T(pe# Problems

Chapter 4 Long-Term
se the following to answer 6!estion 14#
'arble Comics Gro!p

$alance %heet for Mear
Mear =nding )99) and )99*
@B in millions?
)99) )99* )99) )9 9 *
Cash B 2 B 1 * "cco!nts pa(able B 57 B119

"cco!nts receivable )*9 )14 >otes pa(able ))2 44)
3nventor( )49 155 C!rrent liabilities *10 )
C!rrent assets 4  *2 Long-term debt 0 1 44 9
Fi8ed assets 255 579 Common stock  
<etained earnings *42 *5 9
Total assets B1+*** B1+4)2 Total liab. Q e6!it( B1+*** B1+4)2
'arble Comics Gro!p

)99* 3ncome %tatement
@B in millions?
>et sales B79

Less# Cost of goods sold  ))
Less# General Q adm. e8penses 7*
Less# /epreciation 119
=arnings before interest and ta8es 1 59
Less# 3nterest paid 01
=arnings before ta8es 117
Less# Ta8es *9
>et income B 57
14. "ss!me costs and assets increase at the same rate

rate as sales. "lso ass!me
ass!me 49K of net income is paid
paid o!t in
dividends+ the c!rrent debt to e6!it( ratio is optimal+ and that no new e6!it( sales are possible? Forecast the
addition to retained earnings ass!ming the firms sales increase at the ma8im!m percent possible given
these ass!mptions.
"? B4*.)
$? B55.
C? B11*.*
/? B140.2
=? B102.5
"ns# = Level# Challenge %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Problems
140. " firm c!rrentl(

c!rrentl( has sales of B0*9+999
B0*9+999 and costs of B*+0*0. The
The marginal ta8 rate is *4K. nder the
percentage of sales approach+ what is the pro&ected net income if sales are e8pected to increase b( 1KH
"? B9+499
$? B4+4*)
C? B2+701
/? B2)+041
=? B74+99
"ns# C Level# 3ntermediate %!b&ect# Percentage :f %ales "pproach T(pe#

T(pe# Concepts
Cop(right ; )99 'cGraw-ill <(erson Limited. Page *)

Chapter 4 Long-Term
142. " firm

firm c!rrentl( has sales of B9+999+
B9+999+ a 0K profit
profit margin and a 49K dividend pa(o!t ratio. ,hat is the
anticipated amo!nt of dividends to be paid to shareholders if sales are e8pected to increase b( KH
"? B1*+)99
$? B1*+509
C? B*4+09
/? B))9+999
=? B)*1+999
"ns# $ Level# 3ntermediate %!b&ect# /ividend Pa(o!t <atio T(pe#

T(pe# Concepts
145. " firm c!rrentl(

c!rrentl( has sales of B504+999+
B504+999+ a *4K marginal ta8 rate+
rate+ and a dividend pa(o!t ratio of K.
K. Costs
e6!al 5K of sales. ,hat is the anticipated increase to retained earnings if sales are e8pected to increase b(
0KH
"? B*5+47)
$? B49+591
C? B42+944
/? B47+502
=? B79+005
"ns# $ Level# 3ntermediate %!b&ect# Plowback <atio T(pe#

T(pe# Concepts
147. "t the end of last (ear+

(ear+ a firm had a c!rrent
c!rrent ratio of 1.4+ net fi8ed assets
assets of B)+99+ notes pa(able of B9+ and
total assets of B+199. $ased on pro-forma sales+ c!rrent liabilities will increase b( B99 and c!rrent assets
will increase b( B799. $( how m!ch can notes pa(able increase on the pro forma statement witho!t
changing the c!rrent ratioH
"? B9
$? B14*
C? B499
/? B002
=? B209
"ns# $ Level# Challenge %!b&ect# Pro-Forma >et ,orking

,orking Capital T(pe#
T(pe# Concepts
19. " firm has

has sales of B09+707 and is operating at 5*K capacit(.
capacit(. The firm has
has total assets of B475+*99 and
c!rrent assets of B50+799. ,hat is the capital intensit( ratio at f!ll capacit(H
"? . )
$? .0 4
C? 1.94
/? 1.5
=? 1.7)
"ns# $ Level# 3ntermediate %!b&ect# Capacit( sage T(pe#

T(pe# Concepts
11. " firm has

has an <:= of 2.K and an
an <:" of 1*.K. ,hat is the internal growth rate
rate if the firm has a 49K
dividend pa(o!t ratioH
"? 4.21K
$? .21K
C? 5.19K
/? 5.51K
=? 7.17K
"ns# / Level# 3ntermediate %!b&ect# 3nternal Growth <ate T(pe#

T(pe# Concepts
Cop(right ; )99 'cGraw-ill <(erson Limited. Page **

Chapter 4 Long-Term
1). "ss!ming the following

following ratios are constant+ what is the s!stainable growth rateH
Total asset t!rnover O ).99

Profit margin O .9K
=6!it( m!ltiplier O 1.9
Pa(o!t ratio O 09K
"? 5.99K
$? 19.0)K
C? 14.49K
/? 10.5)K
=? )4.99K
"ns# $ Level# 3ntermediate %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Concepts
1*. $ased on the following information+

information+ what is the s!stainable growth rateH
/ividends O B1)+999
>et income O B*9+999
/ebt-e6!it( ratio O . 9
Capital intensit( ratio O 1.)
Profit margin O 5K
"? *.97K
$? *.77
C? .4)K
/? 0.11K
=? 7.79K
"ns# / Level# Challenge %!b&ect# %!stainable Growth <ate T(pe#

T(pe# Concepts
14. " firm c!rrentl(

c!rrentl( has sales of B1.*) million and B704+99 in fi8ed assets. C!rrentl(
C!rrentl( operations are at 54K of
capacit(. $( how m!ch can sales increase witho!t re6!iring the firm to p!rchase an( additional fi8ed
assetsH
"? B14+*)9
$? B15*+214
C? B)11+)99
/? B)1+4)7
=? B*+99
"ns# / Level# 3ntermediate %!b&ect# F!ll Capacit( T(pe#

T(pe# Concepts
1. " firm has

has an 5K profit margin
margin and a .7 ratio of sales to total assets.
assets. The firm maintains a 49K
49K dividend
pa(o!t ratio and a 19K rate of growth. 3f the debt-e6!it( ratio is held constant+ what m!st that rate beH
"? .2 9
$? .5 7
C? 1.11
/? 1.)
=? 1.29
"ns# " Level# Challenge %!b&ect# Growth "nd /ebt-=6!it( <atio T(pe#
T(pe# Concepts

Chapter 4 Long-Term
se the following to answer 6!estions 10-109#
,intergreen+
,intergreen+ 3nc
3ncome %tatement for the Present Mear
Mear
>et sales B14+09

Costs B1)+19*
Ta8able income B)+42
Ta8es B500
>et income B1+051
,intergreen+ 3nc.
$alance %heet for the Present Mear
Mear
Cash B )  "cco!nts pa(able B1+70*

"cco!nts receivable B*+1* >otes pa(able B)+015
3nventor( B720 Total B4+51
Total B4+0*0 Long-term debt B0+099
>et fi8ed assets B)*+229 Common stock B2+99
<etained earnings B7+2)
Total assets B)5+490 Total liabilities and e6!it(
B)5+490
"ssets+ acco!nts pa(able and costs are proportional to sales. /ebt and e6!it( are not.
10. %ales of ,intergreen+

,intergreen+ 3nc. are e8pected to increase b( 2K ne8t (ear.
(ear. ,intergreen
,intergreen is c!rrentl( operating at
ma8im!m capacit(. ,intergreen
,intergreen does not pa( a dividend. Given t his pro&ection+ which one of the
t he following
statements is correct concerning ne8t (ears pro forma statement for ,intergreen
,intergreen 3nc. if the percentage of
sales approach is !sedH
"? Cost
Costss are
are pro
pro&e
&ect
cted
ed to be
be B11
B11+*11
+*11..
$? >et
>et inco
incomeme is
is pro
pro&e
&ect
cted
ed to be
be B1+
B1+75
750.
0.
C? The
The pro
pro&e&ect
cted
ed ret
retai
aine
nedd earn
earning
ingss is B11+
B11+49
490.
0.
/? The
The long
long-t-ter
erm
m debt
debt is
is pro&e
pro&ect
cted
ed to
to be B2+9
B2+90)
0)..
=? The
The =F>
=F> is pro&
pro&ec
ecte
ted
d to
to be
be B
B).
"ns# = Level# 3ntermediate %!b&ect# Percentage :f %ales 'ethod T(pe#

T(pe# Concepts

,intergreen+ 3nc are e8pected to increase b( 0K ne8t (ear.
(ear. ,intergreen
ma8im!m capacit(. ,intergreen
,intergreen has a )9K dividend pa(o!t ratio. ,hat is the e8ternal financing needH
"? -B170
$? -B101
C? B101
/? B170
=? B)27
"ns# C Level# 3ntermediate %!b&ect# =8ternal Financing >eed T(pe#

T(pe# Concepts
Cop(right ; )99 'cGraw-ill <(erson Limited. Page *

Chapter 4 Long-Term

,intergreen+ 3nc. are e8pected to increase b( 1)K ne8t (ear.
(ear. ,intergreen
5K of capacit(. The plowback ratio is 09K. ,hat is the e8ternal financing needH
"? -B519
$? -B4**
C? B1+)79
/? B1+0*
=? B)+94*
"ns# " Level# Challenge %!b&ect# =8ternal Financing >eed T(pe#

T(pe# Concepts
17. ,intergreen+
,intergreen+ 3nc. is prod!cing at 5)K of
of capacit(. ,hat is the capital intensit( ratio at ma8im!m capacit(H
capacit(H
"? . *
$? .0 *
C? 1.))
/? 1.44
=? 1.7
"ns# = Level# 3ntermediate %!b&ect# Capital 3ntensit( <atio T(pe#

T(pe# Concepts
109. %ales of ,intergreen+

,intergreen+ 3nc. are
are e8pected to increase b( 1*K ne8t (ear.
(ear. The dividend pa(o!t
pa(o!t ratio is *K.
The compan( is c!rrentl( operating at 7*K of capacit(. ,hat is the pro&ected retained earnings balance at
the end of ne8t (earH
"? B1*)
$? B414
C? B1+)*
/? B)+952
=? B)+)9*
"ns# C Level# 3ntermediate %!b&ect# <etained =arnings T(pe#

T(pe# Concepts

Chapter 4 Long-Term
se the following to answer 6!estions 101-10#
/o!glass =nterprises
3ncome %tatement for the Present Mear
Mear
%ales B4+549
Costs B4+1)9
Ta8able 3ncome B2)9
Ta8es B)4
>et 3ncome B42
/i
/ividends B179
"ddition to ret. earnings B)5
/o!glass =nterprises
$alance %heet for the Present
P resent Mear
Mear
Cash B1+919 "cco!nts pa(able B*0

"cco!nts rec. B *9 ) >otes pa(able B1+99
3nventor( B*01 C!rrent liabilities B)+9*0
C!rrent assets B1+02* Long-term debt B1+)99
Fi8ed assets B+)99 Common stock B*+999
<etained earnings B0*2
Total assets B0+52* Total liabilities. Q e6!it( B0+52*
"ssets+ acco!nts pa(able and costs are proportional to sales. /ebt and e6!it( are not.
101. ,hat is the internal

internal rate of growth for /o!glass
/o!glass =nterprise
=nterprisesH
sH
"? 4.**K
$? 0.99K
C? 0.71K
/? 2.*7K
=? 11.)4K
"ns# " Level# 3ntermediate %!b&ect# 3nternal <ate :f Growth T(pe#

T(pe# Concepts
10). ,hat is the s!stainable rate of growth for

for /o!glass =nterprisesH
"? 2.54K
$? 5.9K
C? 5.07K
/? 7.))K
=? 1.9)K
"ns# $ Level# 3ntermediate %!b&ect# %!stainable <ate :f Growth T(pe#

T(pe# Concepts

Chapter 4 Long-Term
10*. The sales of /o!glass =nterprises

=nterprises are e8pected to increase
increase b( 14K ne8t (ear.
(ear. The
The firm is c!rrentl(
prod!cing at f!ll capacit(. 'anagement
'anagement wants to maintain a constant debt-e6!it( ratio and a constant
dividend pa(o!t ratio. ,hat is the
t he e8ternal financing needH
"? -B*)
$? -B)*5
C? B4)
/? B0)
=? B70)
"ns# / Level# 3ntermediate %!b&ect# =8ternal Financing >eed T(pe#

T(pe# Concepts
104. The sales of /o!glass =nterprises

(ear. The
The debt-e6!it( ratio and the
dividend pa(o!t ratio are to be held constant. C!rrentl( the firm is prod!cing at 5)K of capacit(. ,hat is
the addition to retained earningsH
"? B*11
$? B*5
C? B4*2
/? B42
=? B15
"ns# " Level# 3ntermediate %!b&ect# "ddition To <etained =arnings T(pe#

T(pe# Concepts
10. The sales of /o!glass =nterprises

(ear. The
The debt-e6!it( ratio and the
dividend pa(o!t ratio are to be held constant. C!rrentl( the firm is prod!cing at 55K of capacit(. ,hat is
the re6!ired increase in net fi8ed assetsH
"? B9
$? B120
C? B)51
/? B*1)
=? B)9
"ns# " Level# 3ntermediate %!b&ect# 3ncrease 3n >et Fi8ed "ssets T(pe#
T(pe# Concepts
100. The a!thors state that Jconventional b!siness wisdom

wisdom holds that financial
financial plans dont work+ b!t financial
planning does. J ,hat is meant b( thisH 3gnoring the acc!rac( of the n!mbers in a financial plan @which
can onl( be determined after the fact an(wa(?+ what does the process of financial pl anning accomplishH
"ns# "n !nderl(ing
!nderl(ing theme
theme of the chapter
chapter is that+ while no one can
can predict
predict f!t!re events+
events+ the act of
planning for vario!s contingencies forces decision-makers
decision-makers to consider what might happen+ as well as
the interactions between investment and financing decisions and the implications of their
t heir decisions
on other aspects of firm performance. 3n other words+ alert st!dents will pick !p on the integrative
nat!re of financial planning.
Level# Challenge %!b&ect# Financial Planning T(pe#

T(pe# =ssa(s
102. ow wo!ld (o! respond to a b!siness

b!siness owner who sa(s J3 see no need in p!tting together a financial plan
for the f!t!re. "ll of the n!mbers in t he plan are &!st g!esses an(wa(+ no one knows what will happen for
s!re. 3 have a good idea what sales will be and be(ond that+ if sales are good+ who needs a planHJ
"ns# This is an open-ended
open-ended 6!estion
6!estion that basicall(
basicall( asks st!dents
st!dents to list the advantages
advantages to be gained from
from
financial planning. 'ore importantl(+ it ma( be a 6!estion the st!dent has has not tho!ght abo!t
abo!t in
these terms.
Level# Challenge %!b&ect# $enefits of Planning T(pe#

T(pe# =ssa(s

Chapter 4 Long-Term
105. ,hat do (o! think will happen to a growing

growing b!siness whose owner cancan forecast sales 6!ite acc!ratel(
acc!ratel( b!t
has no idea what impact sales growth will have on assetsH
"ns# The b!siness
b!siness will need to add assets to grow+
grow+ and will likel( e8perience e8ternal financing needs.
needs. 3n
addition+ the firm will likel( e8perience li6!idit( problems and the manager will need to devote time
and energ( to solving those problems.
Level# Challenge %!b&ect# Financial Planning T(pe#

T(pe# =ssa(s
107. 3t is stated in the te8t that the planners ass!mptions abo!t f!t!re sales growth
growth serves as the JdriverJ
JdriverJ for the
financial plan. ,hat factors andEor t(pes
t(pes of decisions determine how m!ch salessales growth the firm can
accommodateH
"ns# This is an open-ended
open-ended 6!estion
6!estion which reall(
reall( gets to the heart of the financial
financial planning process
processII i.e.+
the management of growth. %ome instr!ctors ma( wish to emphasie
emphasie in their lect!res that @to
paraphrase iggins? a firm can Jgrow itself o!t of b!sinessJ. 3n other words+ rapid+ !ne8pected sales
increases can res!lt
res!lt in poor capital b!dgeting+ financing+ or working capital decisions. $(
!nderstanding what factors contrib!te to the firms i nternal and s!stainable growth rates+ st!dents can
better !nderstand the nat!re of the decisions necessar( to accommodate growth.
growth.
Level# Challenge %!b&ect# %ales Growth T(pe#

T(pe# =ssa(s
129. %!ppose a firm calc!lates its =F> and finds that it is negative. ,hat
,hat are the firms options in this caseH
caseH
"ns# ,ith
,ith negative =F>+
=F>+ the firm has a s!rpl!s of f!nds that
that it can !se to red!ce
red!ce c!rrent
c!rrent liabilities+
liabilities+ red!ce
long-term debt+ b!( back common stock+ or increase dividends. "s a least-best alternative+ the firm
co!ld choose to add assets+ b!t this
t his re6!ires some additional ass!mptions abo!t >Ps+ etc.
Level# Challenge %!b&ect# >egative =F> T(pe#

T(pe# =ssa(s
121. %tate the ass!mptions that !nderlie the s!stainable

s!stainable growth rate and
and interpret what the s!stainable growth
rate means.
"ns# The !s!al
!s!al ass!mptions
ass!mptions are# Costs and assets
assets increase
increase proportiona
proportionatel(
tel( with sales+
sales+ the dividend pa(o!t
pa(o!t
ratio is fi8ed @or is given?+ the c!rrent debt-e6!it( ratio is optimal+ no new e6!it( sales are possible.
The s!stainable growth rate is the ma8im!m rate at which sales can increase with the restriction that
no new e6!it( sales are possible and long-term debt increases onl( in an amo!nt that keeps the debt-
e6!it( ratio fi8ed.
Level# Challenge %!b&ect# %!stainable Growth T(pe#

T(pe# =ssa(s
12). Consider a firm which forecasts that costs+ assets+ and

and c!rrent liabilities will all change proportionatel( with
sales and the dividend pa(o!t ratio will remain fi8ed. ow will the firms <:= change as a res!lt of a
forecast *9K increase in salesH ow will the individ!al components of <:= @the /! Pont identit (? changeH
,h(H
"ns# The <:= and all of its componentsRpr
componentsRprofitofit margin+
margin+ total asset t!rnover
t!rnover++ and e6!it( m!ltiplierRw
m!ltiplierRwill
ill
all remain !nchanged. This is the essence of the percentage of sales approach
approach to forecasting.
Level# 3ntermediate %!b&ect# 3nterpreting Growth T(pe#

T(pe# =ssa(s

Chapter 4 Long-Term
12*. Fi8ed assets are often said

said to grow in a Jstair-stepJ
Jstair-stepJ like manner. ,hat does this meanH ,h(
,h( is this a better
wa( to e8plain the growth of fi8ed assets as compared to sa(ing that fi8ed assets grow proportionall( with
salesH
"ns# The nat!re of fi8ed assets prevents
prevents them from
from rising proportionatel(
proportionatel( with each
each !nit increase in sales.
3nstead+ a firm will p!rchase new e6!ipment or b!ild a new facilit( as it nears f!ll capacit(. The new
assets will then increase the capacit(
capacit( level and ca!se the firm
firm to prod!ce below that level. This will
contin!e !ntil s!ch time as sales begin to reach the new ma8im!m level of prod!ction+ at which time
the firm will consider additional
additi onal fi8ed asset p!rchases. Th!s+ fi8ed assets increase in a Jstair-stepJ
like pattern rather than as a straight linear f!nction.
Level# 3ntermediate %!b&ect# Fi8ed "sset Growth T(pe#

T(pe# =ssa(s
124. 3n general+ wo!ld firms tend to follow

follow the internal rate of growth or the s!stainable rate of growthH =8plain
=8plain
the reasoning behind (o!r answer.
"ns# ,hile opinions
opinions ma( var(+
var(+ this 6!estion
6!estion sho!ld get st!dents
st!dents thinking abo!t
abo!t the difference
differencess and the
meaning of each growth rate. %ince man( firms tend to hold their debt-e6!it( ratio fairl( constant+
the primar( arg!ment sho!ld be that the s!stainable growth rate is more commonl ( !sed.
Level# 3ntermediate %!b&ect# 3nternal ers!s

ers!s %!stainable <ate :f Growth T(pe#
T(pe# =ssa(s

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Chapter 4 Long-Term

Long-Term Financial Planning and Corporate Growt h

1. Financial planning helps investigate the linkages between

"ns# Tr!e Level# $asic %!b&ect# Financial Planning 'odels T(pe#

). Financial planning is important beca!se the onl(

"ns# False Level# $asic %!b&ect# Financial Planning T(pe#

*. Conventional wisdom holds

"ns# Tr!e Level# $asic %!b&ect# Financial 'anagement Goals T(pe#

4. ,ith good financial planning+

"ns# False Level# $asic %!b&ect# Financial Planning T(pe#

. The firms investment and

"ns# False Level# $asic %!b&ect# /ecision 'aking T(pe#

0. There are no direct connections

"ns# False Level# $asic %!b&ect# ario!s

2. 3n most ind!stries+ planning

"ns# False Level# $asic %!b&ect# Planning orion T(pe#

"ns# False Level# $asic %!b&ect# "ggregation T(pe#

"ns# False Level# $asic %!b&ect# Planning 'odels T(pe#

"ns# False Level# $asic %!b&ect# Capital 3ntensit( T(pe#

11. "n increase in a firms capital

"ns# Tr!e Level# $asic %!b&ect# Capital 3ntensit( T(pe#

Cop(right ; )99 'cGraw-ill <(erson Limited. Page 1

1). "ll else e6!al+ the lower the forecast

"ns# False Level# $asic %!b&ect# =8ternal Financing >eeded T(pe#

"ns# False Level# $asic %!b&ect# =8ternal Financing >eeded T(pe#

"ns# Tr!e Level# $asic %!b&ect# =8ternal Financing >eeded T(pe#

1. "ll else e6!al+ a firm that !tilies assets inefficientl(

"ns# False Level# $asic %!b&ect# %!stainable Growth <ate T(pe#

"ns# " Level# $asic %!b&ect# Planning orion T(pe#

12. The process b( which smaller

"ns# $ Level# $asic %!b&ect# "ggregation T(pe#

15. Pro forma

"ns# / Level# $asic %!b&ect# Pro Forma %tatements T(pe#

Cop(right ; )99 'cGraw-ill <(erson Limited. Page )

17. The designated so!rce@s? of e8ternal financing re6!ired

"ns# = Level# $asic %!b&ect# Pl!g ariable

)9. The financial planning method in which acco!nts

"ns# " Level# $asic %!b&ect# Percentage :f %ales T(pe#

)1. The dividend

"ns# C Level# $asic %!b&ect# /ividend Pa(o!t <atio T(pe#

)). The retention

"ns# $ Level# $asic %!b&ect# <etention <atio T(pe#

)*. The reten

"ns# / Level# $asic %!b&ect# <etention <atio T(pe#

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)4. The capital

"ns# / Level# $asic %!b&ect# Capital 3ntensit( <atio T(pe#

"ns# " Level# $asic %!b&ect# Capital 3ntensit( <atio T(pe#

)0. The internal

"ns# C Level# $asic %!b&ect# 3nternal Growth <ate T(pe#

)2. "ll else e6!al+ an increase in a firms dividend pa(o!t ratio

"ns# C Level# $asic %!b&ect# 3nternal Growth <ate T(pe#

)5. The s!stainable growth rate of a firm

"ns# / Level# $asic %!b&ect# %!stainable Growth <ate T(pe#

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)7. 3f a firm wants to maintain its c!rrent

"ns# C Level# $asic %!b&ect# %!stainable Growth <ate T(pe#

"ns# C Level# $asic %!b&ect# 3nternal Growth <ate T(pe#

*1. The two ke( dimensions

"ns# C Level# $asic %!b&ect# Financial Planning /imensions T(pe#

*). " pro&ection !sing the most optimistic

"ns# / Level# $asic %!b&ect# $est Case %cenario T(pe#

**. /etermining the amo!nt of li6!idit( needed b( a firm is referred