Question 1

Which one of the following ratios is not part of the "standard" return on equity ROE) model?
A) net profit margin
B) asset turnover
C) equity multiplier
D) retention rate

Accepted Answer

The standard ROE model, also known as the DuPont analysis, includes net profit margin, asset turnover, and equity multiplier. Retention rate is not part of this model.

Question 2

The increase in accounts payables and accruals that occur with a sales increase is called:
A) spontaneously generated funds
B) additional funds needed
C) addition in retained earnings
D) financial capital needed

Accepted Answer

Spontaneously generated funds refer to the increase in current liabilities (accounts payables and accruals) that occur with an increase in sales. These funds are generated internally and do not require additional financing from external sources. Therefore, option A is the best choice. Option B refers to the amount of external financing needed to fund an increase in assets, which is not applicable in this scenario. Option C refers to the increase in equity that occurs from retaining earnings, which is also not applicable in this scenario. Option D refers to the amount of external financing needed to fund a business operation, which is also not applicable in this scenario.

Question 3

The financial funds still needed to finance asset growth after using spontaneously generated funds and any increase in retained earnings is called:
A) spontaneously generated funds
B) additional funds needed
C) addition in retained earnings
D) financial capital needed

Accepted Answer

The term "additional funds needed" refers to the extra financing required to support asset growth after accounting for spontaneously generated funds and retained earnings.

Question 4

If beginning of period common equity is $200,000 and end of period common equity is $300,000, the sustainable growth rate is:
A) 33%
B) 40%
C) 50%
D) 67%
E) 75%

Accepted Answer

The answer of If beginning of period common equity is...

Question 5

Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm's AFN?
A) $200,000
B) $600,000
C) $840,000
D) $960,000
E) $1,400,000

Accepted Answer

The Additional Funds Needed (AFN) is calculated using the formula: AFN = (A*/S0)ΔS - (L*/S0)ΔS - M(S1)(RR). Here, A*/S0 = 7/10, L*/S0 = 0.2/10, ΔS = 2, M = 0.8, S1 = 12, RR = 0.6. Plugging in the values, AFN = (0.7)(2) - (0.02)(2) - (0.8)(12)(0.6) = 1.4 - 0.04 - 5.76 = 0.84 million or $840,000.

Question 6

A firm has net income of $320,000 on sales of $3,200,000. Its assets total $2,000,000; the equity at the beginning of the year was $1,600,000 and dividends paid were $80,000. What is the sustainable growth rate?
A) 5%
B) 15%
C) 6.25%
D) 4.69%
E) none of the above

Accepted Answer

The answer of A firm has net income of $320,000...

Question 7

Determine a firm's "return on assets" percentage based on the following information: sustainable growth rate = 20%; total assets $500,000; beginning of year common equity $200,000; and dividend payout percentage = 60%.
A) 10.0%
B) 12.5%
C) 15.0%
D) 17.5%
E) 20.0%

Accepted Answer

The answer of Determine a firm's "return on assets" percentage...

Question 8

A venture's common equity was $50,000 at the end of last year. If the venture's common equity at the end of this year was $60,000, what was its sustainable sales growth rate?
A) 5%
B) 10%
C) 15%
D) 20%
E) 25%

Accepted Answer

The answer of A venture's common equity was $50,000 at...

Question 9

If a venture has a return on assets ROA) = 10%, an equity multiplier based on beginning equity = 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be:
A) 10%
B) 16%
C) 20%
D) 24%
E) 40%

Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROA * (1 - Dividend Payout Ratio) * Equity Multiplier. Substituting the given values: SGR = 10% * (1 - 0.60) * 4 = 16%.

Question 10

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%.
A) 10%
B) 16%
C) 20%
D) 24%
E) 30%

Accepted Answer

The answer of Determine a venture's sustainable growth rate based...

Question 11

The financial funds needed to acquire assets necessary to support a firm's sales growth is called:
A) spontaneously generated funds
B) additional funds needed
C) addition in retained earnings
D) financial capital needed

Accepted Answer

The financial funds needed to acquire assets necessary to support a firm's sales growth is called financial capital needed. Option A, spontaneously generated funds, refers to the funds that are generated internally by the business without requiring any additional financing. Option B, additional funds needed, refers to the amount of funds required by the company beyond the internally generated funds to achieve the desired sales growth. Option C, addition in retained earnings, refers to the portion of net income that is not paid out as dividends, which is added to the company's retained earnings account. None of these options accurately describe the financial funds needed to acquire assets necessary to support a firm's sales growth.

Question 12

Which one of the following would increase a firm's need for additional funds?
A) an increasing profit margin
B) a decreasing expected sales growth rate
C) an increase in accruals
D) an increasing dividend payout rate
E) a decrease in assets

Accepted Answer

An increasing dividend payout rate means the firm is distributing more of its earnings to shareholders, leaving less retained earnings to finance future growth, thus increasing the need for additional funds.

Question 13

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and the retention rate = 50%.
A) 10%
B) 15%
C) 20%
D) 25%
E) 30%

Accepted Answer

The sustainable growth rate (SGR) is calculated as the return on equity (ROE) multiplied by the retention rate. ROE is net income divided by common equity at the beginning of the year, which is $100,000 / $500,000 = 0.20 or 20%. The retention rate is 50%, so SGR = 20% * 50% = 10%.

Question 14

A venture's common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate?
A) 5%
B) 10%
C) 15%
D) 20%
E) 25%

Accepted Answer

The answer of A venture's common equity account increased by...

Question 15

If a venture has a return on assets ROA) = 12%, an equity multiplier based on beginning equity = 3.0 times, and a sustainable growth rate of 18%, the retention rate would be:
A) 10%
B) 20%
C) 30%
D) 40%
E) 50%

Accepted Answer

The answer of If a venture has a return on...

Question 16

Which of the following is a forecasting method used to project financial statements?
A) percent-of-sales method
B) percent-of-expenses method
C) GNP-ratio method
D) a and b
E) a, b, and c

Accepted Answer

The answer of Which of the following is a forecasting...

Question 17

A sales growth rate based on the retention of profits is referred to as the:
A) real sales growth rate
B) sustainable sales growth rate
C) spontaneous sales growth rate
D) nominal sales growth rate
E) weighted average sales growth rate

Accepted Answer

The sustainable sales growth rate is the rate at which a company can grow its sales based on the retention of profits, without needing to increase debt or equity financing.

Question 18

Use the following information to estimate a venture's sustainable growth rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25%.
A) 50%
B) 25%
C) 20%
D) 10%
E) 5%

Accepted Answer

The sustainable growth rate (SGR) is calculated as the product of the retention rate and the return on equity (ROE). ROE is net income divided by equity. Given an equity multiple of 2.0, equity is $500,000. Thus, ROE = $200,000 / $500,000 = 0.4 or 40%. SGR = 40% * 25% = 10%.

Question 19

If a venture has a return on assets ROA) = 10%, an equity multiplier based on beginning equity = 3.5 times, and a retention rate = 50%, the sustainable growth rate would be:
A) 10%
B) 17.5%
C) 35%
D) 40%
E) 20.5%

Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROA * Equity Multiplier * Retention Rate. Here, SGR = 10% * 3.5 * 50% = 17.5%.

Question 20

Determine a firm's "financial policy" multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2 times.
A) 1.00
B) 1.25
C) 1.50
D) 1.75
E) 2.00

Accepted Answer

The answer of Determine a firm's "financial policy" multiplier based...

Quiz 9: Projecting Financial Statements

Which one of the following ratios is not part of the "standard" return on equity ROE) model?

The increase in accounts payables and accruals that occur with a sales increase is called:

The financial funds still needed to finance asset growth after using spontaneously generated funds and any increase in retained earnings is called:

If beginning of period common equity is $200,000 and end of period common equity is $300,000, the sustainable growth rate is:

A firm has net income of $320,000 on sales of $3,200,000. Its assets total $2,000,000; the equity at the beginning of the year was $1,600,000 and dividends paid were $80,000. What is the sustainable growth rate?

Determine a firm's "return on assets" percentage based on the following information: sustainable growth rate = 20%; total assets $500,000; beginning of year common equity $200,000; and dividend payout percentage = 60%.

A venture's common equity was $50,000 at the end of last year. If the venture's common equity at the end of this year was $60,000, what was its sustainable sales growth rate?

If a venture has a return on assets ROA) = 10%, an equity multiplier based on beginning equity = 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be:

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%.

The financial funds needed to acquire assets necessary to support a firm's sales growth is called:

Which one of the following would increase a firm's need for additional funds?

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and the retention rate = 50%.

A venture's common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate?

If a venture has a return on assets ROA) = 12%, an equity multiplier based on beginning equity = 3.0 times, and a sustainable growth rate of 18%, the retention rate would be:

Which of the following is a forecasting method used to project financial statements?

A sales growth rate based on the retention of profits is referred to as the:

Use the following information to estimate a venture's sustainable growth rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25%.

If a venture has a return on assets ROA) = 10%, an equity multiplier based on beginning equity = 3.5 times, and a retention rate = 50%, the sustainable growth rate would be:

Determine a firm's "financial policy" multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2 times.