Question 1

Relative to its assets, a firm with a large volume of retained earnings and a high ROE:

Accepted Answer

A high volume of retained earnings indicates that the firm has been profitable and has not distributed all of its earnings as dividends to shareholders. A high ROE indicates that the firm is effectively utilizing its assets to generate profits. Therefore, the firm can use its retained earnings to reinvest in the business and generate a higher growth rate without needing to raise additional capital.

Question 2

If the projected growth rate is smaller than the firm's sustainable growth rate:

Accepted Answer

The answer of If the projected growth rate is smaller...

Question 3

Calculate the rate at which the firm can grow without changing its leverage if its payout ratio is 70%, equity outstanding at the beginning of the year is $900,000, and its net income for the year is $150,000:

Accepted Answer

The answer of Calculate the rate at which the firm...

Question 4

A firm's internal growth rate is all of the following except:

Accepted Answer

The answer of A firm's internal growth rate is all...

Question 5

The effects of a change in sales on working capital will be seen in which section of a financial plan:

Accepted Answer

The answer of The effects of a change in sales...

Question 6

If a firm chooses to maintain a fixed debt-equity ratio, they can raise the additional needed funds by:

Accepted Answer

Maintaining a fixed debt-equity ratio means keeping the proportion of debt and equity in the capital structure constant. If the firm needs additional funds, issuing debt would help maintain this ratio. However, if the firm issues stock to raise funds, the equity portion would increase, which would change the debt-equity ratio. Therefore, issuing debt and keeping the amount of debt as the balancing item would be the best choice in this case. Dividends do not affect the debt-equity ratio, so option A and C can be eliminated. Option D is incorrect as issuing stock would change the debt-equity ratio.

Question 7

If sales growth for XYZ Corporation exceeds 6%, which in turn causes XYZ to seek external financing, then 6% is the:

Accepted Answer

The answer of If sales growth for XYZ Corporation exceeds...

Question 8

In a financial planning model:

Accepted Answer

Inputs like historical financial statements, market research, and economic data are used to construct a financial planning model. Financial ratios and equations are then used within the model to develop forecasts and financial statements.

Question 9

A firm that wants to increase its sustainable growth rate can do so by __________ the __________ ratio or by __________ the __________ or both.

Accepted Answer

In order to increase sustainable growth rate, the firm needs to increase either the plowback (retention) ratio or the return on equity (ROE), or both. The plowback ratio is the proportion of earnings that is reinvested back into the business to fuel future growth, while ROE measures the firm's profitability relative to shareholders' equity. By increasing the plowback ratio, the firm can retain more earnings and reinvest them into the business, thus increasing the growth potential. Similarly, by increasing ROE, the firm can generate more profits for every dollar of equity invested, which translates into higher earnings and better prospects for growth. Choice B suggests that the firm can achieve this by increasing both plowback and ROE, which is the most effective way to boost sustainable growth rate.

Question 10

A firm's required external financing is determined by the:

Accepted Answer

A firm's projected growth rate will determine how much external financing will be required to support that growth. If the projected growth rate is higher, more external financing will likely be needed to fund the expansion. The sustainable growth rate and plowback ratio are related to the firm's ability to finance growth through internal sources, rather than external financing. The amount of external financing available is not a determining factor in how much financing a firm requires.

Question 11

To avoid inconsistency, financial planners should be sure to:

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The answer of To avoid inconsistency, financial planners should be...

Question 12

What new investment is required for a firm that projects 12% growth has $400,000 in assets, and retained earnings of $40,000?

Accepted Answer

The answer of What new investment is required for a...

Question 13

Dave's Wax Inc.'s financial planners have projected a growth rate of 8% for the coming year.Currently, it has assets of $5,000,000 and retained earnings of $120,000.Calculate the amount of external financing Dave will need:

Accepted Answer

The answer of Dave's Wax Inc.'s financial planners have projected...

Question 14

If a firm's sales increased by 12% and it has no spare capacity, it must increase fixed assets by:

Accepted Answer

If a firm's sales increased by 12% and it has no spare capacity, it means that all of its fixed assets are being utilized. Therefore, to increase sales by 12%, the firm needs to increase its fixed assets by 12% as well. Therefore, the correct answer is D) 12%.

Question 15

Dividend policy is determined by all of the following except:

Accepted Answer

Forecasting is not a determinant of dividend policy; rather, it's a tool used to estimate future earnings and financial needs. Dividend policy is typically influenced by factors such as the company's debt-equity ratio, its need for funds, and as a consequence of other strategic financial planning decisions.

Question 16

With respect to the balance sheet, an increase in equity of $2,000 with an increase in net income to $2,500, leads us to believe:

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The answer of With respect to the balance sheet, an...

Question 17

A forecast using a percentage of sales model expects sales to increase by 20% over the next four years.If costs are proportional to sales at 80%, and last year's sales were $1,000, the net income in the fourth year will be:

Accepted Answer

The answer of A forecast using a percentage of sales...

Question 18

A firm has a debt equity ratio of 1/3, and plans to grow at an annual rate of 10%.Its return on equity is 18%.What is the maximum payout ratio that a company can maintain without resorting to new equity issue?

Accepted Answer

With a debt-equity ratio of 1/3, the equity ratio is 2/3. Therefore, the plowback ratio (retention ratio) is 74%. To maintain the same debt-equity ratio, the firm cannot issue new equity, so the dividend payout ratio cannot exceed (1 - 0.74) = 26%. Therefore, the correct answer is choice C.

Question 19

Which of the following statements is not true regarding financial planning models?

Accepted Answer

The answer of Which of the following statements is not...

Question 20

Sources and uses of funds are made equal through:

Accepted Answer

Sources and uses of funds must be equal in order to have a balanced financial statement. This is achieved through a balancing item, which is a plug figure that represents the difference between sources and uses of funds. This balancing item can be a miscellaneous income or expense account, which is used to ensure that the statement balances.

Quiz 19: Short-Term Financial Planning