Test Bank For Corporate Finance, 8th Canadian Edition by Stephen A. Ross

Chapter 03 - Financial Planning and Growth Multiple Choice Questions 1. Financial planning is concerned with the basic policy elements of: A. investment decision, decisions on the amount of cash payments to shareholders, and the decision of which investment banker to choose. B. the method of raising capital, investment decisions, and the level of growth to attain. C. investment decisions, degree of financial leverage, and the decision on the amount of cash payments to shareholders. D. degree of financial leverage, level of growth to attain, and investment decisions. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Topic: 03-01 What Is Financial Planning? 2. One key reason a long term financial plan is developed is because: A. the plan determines your financial policy. B. the plan determines your investment policy. C. there are direct connections between achievable corporate growth and the financial plan. D. there is unlimited growth possible in a well-developed financial plan. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Topic: 03-01 What Is Financial Planning? 3-1 Chapter 03 Financial Planning and Growth Chapter 03 - Financial Planning and Growth 3. The process of combining smaller projects into a large budget for planning purposes is called: A. aggregation. B. consolidation. C. accumulation. D. capital allocation. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Topic: 03-01 What Is Financial Planning? 4. Projected future financial statements are called: A. plug statements. B. pro forma statements. C. reconciled statements. D. aggregated statements. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Topic: 03-02 A Financial Planning Model: The Ingredients 5. An example of an economic assumption would be: A. growth in sales. B. growth in the capital spending requirement. C. a plug variable. D. change in interest rates. E. growth in dividends. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Topic: 03-02 A Financial Planning Model: The Ingredients 3-2 Chapter 03 - Financial Planning and Growth 6. If accounts receivable are $45,000 and are directly proportional to total sales, the forecast accounts receivable for next year's 5% increase in sales to $125,000 would be: A. $47,250. B. $40,500. C. $49,950. D. impossible to calculate without last year's credit sales. Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Easy Topic: 03-03 The Percentage of Sales Method 7. Financial planning models frequently assume that many variables are proportional to: A. economic growth. B. industry growth. C. interest rates. D. company sales. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Topic: 03-02 A Financial Planning Model: The Ingredients 8. The addition to retained earnings for the financial planning period is equal to: A. Net Income + Taxes - Dividends. B. Net Income - Dividends. C. Net income + Depreciation - Dividends. D. Sales - Dividend. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Topic: 03-03 The Percentage of Sales Method 3-3 Chapter 03 - Financial Planning and Growth 9. If forecasted net income is $3,600.00 and the expected dividend is $1,098 and the tax rate is 34%, what is the retention ratio? A. 0.30. B. 0.198. C. 0.802. D. 0.70. Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Topic: 03-03 The Percentage of Sales Method 10. If a firm holds the dividend payout, the debt to equity ratio and outstanding shares constant while maintaining income and assets proportional to sales, the plug variable is: A. short term debt. B. retained earnings. C. sustainable growth. D. long term debt. E. accounts receivable. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Topic: 03-03 The Percentage of Sales Method 11. The external funds needed (EFN) equation projects the addition to retained earnings as: A. Net Profit Margin ́ D Sales. B. Net Profit Margin ́ D Sales ́ (1 - d). C. Net Profit Margin ́ Projected sales ́ (1 - d). D. Projected sales ́ (1 - d). E. Net Profit Margin ́ Projected sales. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Topic: 03-03 The Percentage of Sales Method 3-4 Chapter 03 - Financial Planning and Growth 12. Growth can be reconciled with the goal of maximizing firm value: A. because greater growth always adds to value. B. because growth must be an outcome of decisions that maximize NPV. C. because growth and wealth maximization are the same. D. because growth of any type cannot decrease value. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 13. Sustainable growth is defined as the level of growth than an entity can: A. maintain if it stays in the same business. B. maintain if it does not change the accounting relationships or capital structure. C. maintain if the net working capital is increased. D. maintain if the sales force grows at the rate of inflation. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Topic: 03-04 The Statement of Comprehensive Income 14. The most recent financial statements for REM Co. are shown below. Statement of Financial Income Statement with Statement of Comprehensive Position Sales Costs Taxes Net income $400 Assets 200 50 Total $150 Income $1200 Debt $600 Equity 600 1200 Total $1200 3-5 Chapter 03 - Financial Planning and Growth Assets and costs are proportional to sales. Debt is not. A dividend of $90 was paid, and REM wishes to maintain a constant payout to net income. Next year's sales are projected to be $480. What is external funds needed (EFN)? A. $240.00 B. $132.00 C. $60.00 D. $168.00 Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Topic: 03-03 The Percentage of Sales Method 15. A firm has a fixed debt-to-equity ratio and dividend policy. Assets and net income are proportional to sales, and new equity will not be issued. Which of the following statements is most correct? A. Almost any growth rate is theoretically possible. B. Only one growth rate is possible. C. The firm cannot grow. D. The firm's growth rate must be less than some maximum. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Topic: 03-04 The Statement of Comprehensive Income 3-6 Chapter 03 - Financial Planning and Growth 16. In estimating pro-forma statement of financial position, projected retained earnings are computed as present retained earnings plus: A. projected retained earnings and cash dividends. B. projected retained earnings plus debt. C. projected retained earnings plus assets. D. projected net income minus cash dividends. E. projected net income earnings minus debt. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Topic: 03-03 The Percentage of Sales Method 3-7 Chapter 03 - Financial Planning and Growth 17. In the financial planning model, external funds needed (EFN) is equal to: A. assets less (liabilities - equity). B. assets less (liabilities + equity). C. (assets + liabilities) less equity. D. (assets + equity) less liabilities. E. assets less equity. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Topic: 03-03 The Percentage of Sales Method 18. The most recent financial statements for Matrix Chip are shown below. Statement of Comprehensive Income Sales Costs Taxes Net income Current assets Fixed assets $880 626 51 $204 Statement of Financial Position $200 Current liabilities $400 2000 Long-term dept 700 Equity 1100 $2200 $2200 3-8 Chapter 03 - Financial Planning and Growth Assets, costs, and current liabilities are proportional to sales. Matrix Chip maintains a constant 50% dividend payout. No external financing is possible. What is the maximum percentage increase in sales that can be sustained? A. 5.55% B. 8.14% C. 10.22% D. 22.72% Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 19. The sustainable growth rate will be equivalent to the internal growth rate when: A. a firm has no debt. B. the growth rate is positive. C. the plowback ratio is positive but less than 1. D. a firm has a debt-equity ratio exactly equal to 1. E. net income is greater than zero. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 3-9 Chapter 03 - Financial Planning and Growth 20. A firm's planning model has assets and cash proportional to sales. The firm maintains a constant dividend payout ratio and a constant debt to equity ratio. Keying in on the asset to sales ratio, the firm's sustainable growth is _________ and ________ the asset to sales ratio. A. higher; higher B. higher; lower C. lower; lower D. constant; higher E. constant; lower Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 3-10 Chapter 03 - Financial Planning and Growth 21. Altering the inputs to a financial plan by changing one of the assumptions is called: A. a redundancy check. B. a pro forma evaluation. C. goal seeking. D. sensitivity analysis. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Topic: 03-01 What Is Financial Planning? 22. The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its: A. rate of return on assets. B. internal rate of growth. C. average historical rate of growth. D. rate of return on equity. E. sustainable rate of growth. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Topic: 03-04 The Statement of Comprehensive Income 23. It is easier to evaluate a firm using its financial statements when the firm: A. is a conglomerate. B. is global in nature. C. uses the same accounting procedures as other firms in its industry. D. has a different fiscal year than other firms in its industry. E. tends to have one-time events such as asset sales and property acquisitions. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 3-11 Chapter 03 - Financial Planning and Growth 24. Which of the following will increase sustainable growth? A. Buy back existing stock. B. Decrease debt. C. Increase profit margin. D. Increase dividend payout ratio. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 25. Assuming the following ratios are constant, what is the sustainable growth rate? Total assets/sales Net income/sales Debt/equity Dividends/net income A. 6.67% B. 5.13% C. 4.06% D. 8.46% Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 1.0 0.1 0.3 0.4 3-12 Chapter 03 - Financial Planning and Growth 26. A firm wishes to maintain a growth rate of 10% per year and a debt-to-equity ratio of 1/2. The dividend payout is.2, and the ratio of total assets to sales is constant at 1.2. What must the profit margin be? A. 10.00% B. 9.09% C. 11.11% D. 8.00% Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 27. A firm wishes to maintain a growth rate of 12% per year and a dividend payout of 10%. The ratio of total assets to sales is constant at 1.5, and profit margin is 10%. What must be the debt-to-equity ratio? A. 0.52 B. 0.67 C. 0.79 D. 0.84 Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 28. If a firm bases its growth projection on the rate of sustainable growth, and shows positive net income, then the: A. fixed assets will have to increase at the same rate, regardless of the current capacity level. B. number of common shares outstanding will increase at the same rate of growth. C. debt-equity ratio will have to increase. D. debt-equity ratio will remain constant while retained earnings increase. E. fixed assets, debt-equity ratio, and number of common shares outstanding will all increase. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Topic: 03-04 The Statement of Comprehensive Income 3-13 Chapter 03 - Financial Planning and Growth 29. Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 40%. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to: A. 40% of the internal rate of growth. B. 60% of the internal rate of growth. C. the internal rate of growth. D. the sustainable rate of growth. E. 60% of the sustainable rate of growth. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Topic: 03-04 The Statement of Comprehensive Income Short Answer Questions 30. Why is it important for managers to understand the importance of both the internal and the sustainable rates of growth? One reason that causes firms to go out of business is the lack of external funding to support the growth of the firm. Understanding the implications of both the internal and sustainable growth rates can help management know when to limit firm growth such that the growth does not exceed the availability of the necessary financing to fund that growth. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 3-14 Chapter 03 - Financial Planning and Growth 31. State the assumptions that underlie the sustainable growth rate and interpret what the sustainable growth rate means. The usual assumptions are: Costs and assets increase proportionately with sales, the dividend payout ratio is fixed (or is given), the current debt-equity ratio is optimal, and no new equity sales are possible. The sustainable growth rate is the maximum rate at which sales can increase with the restriction that no new equity sales are possible and long-term debt increases only in an amount that keeps the debt-equity ratio fixed. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 32. The most recent financial statements for Valley View Distributors are: Statement of Comprehensive Income Statement of Financial Position $3600 ST. Debt $192 LT. Debt $1248 Equity 2160 $3600 Total $3600 Sales Costs Net income $3200 Assets 2600 $600 Total Assets, short term debt and costs are proportional to sales. Long term debt is not. Dividends are 20%. Next year's sales are projected to be $3,600. What is external funds needed (EFN)? EFN = [3600/3200(400)] - [192/3200(400) - 600/3200(3600)(1 - .2)] = = -114 Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Topic: 03-03 The Percentage of Sales Method 3-15 Chapter 03 - Financial Planning and Growth 33. The most recent financial statements for Nosa Co. are: Statement of Comprehensive Income Sales Costs Taxes Net income Current assets Fixed assets $500 400 50 $50 Statement of Financial Position $200 Current liabilities $400 2000 Long-term dept 700 Equity 1100 $2200 $2200 Assets, costs, and current liabilities are proportional to sales. Long-term debt is not. Nosa maintains a constant 50% dividend payout. Next year's sales are projected to be $540. What is external funds needed (EFN)? Given the sales projection, Equity needs are up $144, plus a dividend of $27 must be paid. The new net income will cover $54 of their needed funds, leaving $117 as EFN. EFN = (2200/500)(40) - (400/500)(40) - (.5)(.1)(540) = 117. Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Topic: 03-03 The Percentage of Sales Method 3-16 Chapter 03 - Financial Planning and Growth 34. The most recent financial statements for Quik-chip Co. are: Statement of Comprehensive Income Sales Costs Taxes Net income Working Capital Fixed assets $320 260 20 $40 Statement of Financial Position $400 Long-term dept $820 1650 Equity 1230 $2050 $2050 Assets and costs are proportional to sales. Quik-chip maintains a constant 30% dividend payout and a constant debt-to-equity ratio. What is the maximum sustainable increase in sales assuming no new equity? Apply the formula: 2.334312% increase in sales is equivalent to a $7.47 dollar increase in sales. Blooms: Analyze Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 3-17 Chapter 03 - Financial Planning and Growth 35. Assuming the following ratios are constant, what is the sustainable growth rate? Sales/total assets 0.4 Net income/sales 0.1 Debt/Total Assets 0.2 Retained earnings/net income 0.6 Growth Rate Blooms: Analyze Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 36. A firm wishes to maintain a growth rate of 15% per year while maintaining a debt-to- equity ratio of 1.0, a profit margin of 20% and a dividend payout of 60%. What level of asset efficiency must it achieve? .15 = .15 = .16/(T - .16) T = 1.2267 Therefore TA turnover is.815 or must generate 81.5 cents worth of sales for each dollar in assets. Blooms: Analyze Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 3-18 Chapter 03 - Financial Planning and Growth 37. A firm wishes to maintain a growth rate of 4% per year, a debt-to-equity ratio of.26, and a dividend payout of 40%. If the profit margin is 10%, and next year's sales are projected at $500, what is the total asset projection? ; X = 975.00 Blooms: Analyze Difficulty: Medium Topic: 03-04 The Statement of Comprehensive Income 38. A firm follows the objective of maximizing sales growth. Is maximizing growth always consistent with the shareholders objective and can a firm always achieve this objective if they are at the desired financial relationships for payout, debt to equity and asset structure. No, goals are not the same--shareholders wealth maximization is achieved through positive NPV investment. Increased sales do not necessarily mean increase value. - Fixed relationships only allow for a set growth rate. - If desired growth is different than sustainable growth then relationships must change. - Higher growth means more financing Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Topic: 03-03 The Percentage of Sales Method 39. Suppose a firm calculates its external funding needs and finds that it is negative. What are the firm's options in this case? With a negative external financing need, the firm has a surplus of funds that it can use to reduce current liabilities, reduce long-term debt, buy back common stock, or increase dividends. If acceptable opportunities exist, firms might also use the extra funds to add assets. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Topic: 03-04 The Statement of Comprehensive Income 3-19