Determine changes in balance sheet and income statement

Assignment Help Corporate Finance
Reference no: EM131530554

Multiple Choice

Question 1

Phil is working on a financial plan for the next three years. This time period is referred to as which one of the following?

financial range
planning horizon
planning agenda short-run
current financing period

Question 2

Atlas Industries combines the smaller investment proposals from each operational unit into a single project for planning purposes. This process is referred to as which one of the following?

conjoining
aggregation
conglomeration
appropriation
summation

Question 3

Which one of the following terms is applied to the financial planning method which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values?

percentage of sales method
sales dilution method
sales reconciliation method
common-size method
trend method

Question 4

Which one of the following terms is defined as dividends paid expressed as a percentage of net income?

dividend retention ratio
dividend yield
dividend payout ratio
dividend portion
dividend section

Question 5

Question Which one of the following correctly defines the retention ratio?

one plus the dividend payout ratio
addition to retained earnings divided by net income
addition to retained earnings divided by dividends paid
net income minus additions to retained earnings
net income minus cash dividends

Question 6
Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?

current ratio
equity multiplier
retention ratio
capital intensity ratio
payout ratio

Question 7

The internal growth rate of a firm is best described as the:

minimum growth rate achievable assuming a 100 percent retention ratio.
minimum growth rate achievable if the firm maintains a constant equity multiplier. I maximum growth rate achievable excluding external financing of any kind.
maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
maximum growth rate achievable with unlimited debt financing.

Question 8
The sustainable growth rate of a firm is best described as the:

minimum growth rate achievable assuming a 100 percent retention ratio.
minimum growth rate achievable if the firm maintains a constant equity multiplier. maximum growth rate achievable excluding external financing of any kind.
I maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
maximum growth rate achievable with unlimited debt financing.

Question 9

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan?
I. How much net working capital will be needed?
II. Will additional fixed assets be required?
III. Will dividends be paid to shareholders?
IV. How much new debt must be obtained?

I and IV only
II and III only
I, III, and IV only
II, III, and IV only
I I, II, III, and IV

Question 10

Financial planning:

Answer
focuses solely on the short-term outlook for a firm.
is a process that firms employ only when major changes to a firm's operations are anticipated.
is a process that firms undergo once every five years.
1 considers multiple options and scenarios for the next two to five years.
provides minimal benefits for firms that are highly responsive to economic changes.

Question 11
Financial planning accomplishes which of the following for a firm?
I. determination of asset requirements
II. development of plans to contend with unexpected events
III. establishment of priorities
IV. analysis of funding options

Answer I and III only
II and IV only
I, Ill, and IV only
I, II, and III only
I, II, Ill, and IV

Question 12
Which of the following questions are appropriate to address during the financial planning process?
I. Should the firm merge with a competitor?
II. Should additional shares of stock be sold?
III. Should a particular division be sold?
IV. Should a new product be introduced?

Answer I, II, and III only
I, II, and IV only
I, Ill, and IV only
II, Ill, and IV only I I, II, Ill, and IV

Question 13
Which one of the following statements concerning financial planning for a firm is correct?

Answer Financial planning for fixed assets is done on a segregated basis within each division.
Financial plans often contain alternative options based on economic developments.
Financial plans frequently contain conflicting goals.
Financial plans assume that firms obtain no additional external financing.
The financial planning process is based on a single set of economic assumptions.
Correct Feedback Refer to section 4.1
Incorrect Feedback Refer to section 4.1

Question 14

You are getting ready to prepare pro forma statements for your business. Which one of the following are you most apt to estimate first as you begin this process?

fixed assets
current expenses 1 sales forecast
projected net income
external financing need

Question 15
Which one of the following statements is correct?

Answer Pro forma statements must assume that no new equity is issued.
Pro forma statements are projections, not guarantees.
Pro forma statements are limited to a balance sheet and income statement.
Pro forma financial statements must assume that no dividends will be paid.
Net working capital needs are excluded from pro forma computations.
Correct Feedback Refer to section 4.2
Incorrect Feedback Refer to section 4.2

Question 16
When utilizing the percentage of sales approach, managers:
I. estimate company sales based on a desired level of net income and the current profit margin.
II. consider only those assets that vary directly with sales.
III. consider the current production capacity level.
IV. can project both net income and net cash flows.

I and II only
II and III only
1 III and IV only
I, III, and IV only
II, III, and IV only

Question 17

Question Which one Answer of the following is correct in relation to pro forma statements?
Fixed assets must increase if sales are projected to increase.
Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity.
The addition to retained earnings is equal to net income plus dividends paid.
Long-term debt varies directly with sales when a firm is currently operating at maximum capacity.

Inventory changes are directly proportional to sales changes.

Question 18

Question When constructing a pro forma statement, net working capital generally:

remains fixed.
varies only if the firm is currently producing at full capacity.
varies only if the firm maintains a fixed debt-equity ratio.
varies only if the firm is producing at less than full capacity.
varies proportionally with sales.

Question 19

Question A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume that the firm:
Answer is projected to grow at the internal rate of growth.
is projected to grow at the sustainable rate of growth.
currently has excess capacity.
is currently operating at full capacity.
retains all of its net income.

Question 20
A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:

accounts payable.
long-term debt.
fixed assets.
retained earnings.

Question 21

Which one of the following policies most directly affects the projection of the retained earnings balance
to be used on a pro forma statement?

Answer net working capital policy
capital structure policy I dividend policy
capital budgeting policy capacity utilization policy

Question 22

You are comparing the current income statement of a firm to the pro forma income statement for next year. The pro forma is based on a four percent increase in sales. The firm is currently operating at 85 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, which one of the following statements must be true?

The projected net income is equal to the current year's net income.
The tax rate will increase at the same rate as sales.
Retained earnings will increase by four percent over its current level.
Total assets will increase by less than four percent.
Total liabilities and owners' equity will increase by four percent.

Question 23

A firm is operating at 90 the following account values when percent of capacity. This information is primarily needed to project which one of compiling pro forma statements?
sales
costs of goods sold
accounts receivable
fixed assets
long-term debt

Question 24

Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of sales?

0.70
0.86
1.00
1.06
1 1.15

Question 25
Which of the following are needed to determine the amount of fixed assets required to support each dollar of sales?

I. current amount of fixed assets
II. current sales
III. current level of operating capacity
IV. projected growth rate of sales

Question 26

The plowback ratio is:

Answer equal to net income divided by the change in total equity.
the percentage of net income available to the firm to fund future growth.
equal to one minus the retention ratio.

the change in retained earnings divided by the dividends paid.
the dollar increase in net income divided by the dollar increase in sales.

Question 27

A firm's net working capital and all of its expenses vary directly with sales. The firm is operating currently at 96 percent of capacity. The firm wants no additional external financing of any kind. Which one of the following statements related to the firm's pro forma statements for next year must be correct?

Answer Total liabilities will remain constant at this year's value.
The maximum rate of sales increase is 4 percent. 1 The firm cannot exceed its internal rate of growth.
The projected owners' equity will equal this year's ending equity balance. Fixed assets must remain constant at the current level.

Question 28

Which one of the following will increase the maximum rate of growth a corporation can achieve? Answer avoidance of external equity financing
increase in corporate tax rates
reduction in the retention ratio
decrease in the dividend payout ratio
decrease in sales given a positive profit margin

Question 29

Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year?

The pro forma profit margin is equal to the current profit margin. Retained earnings will increase at the same rate as sales.
Total assets will increase at the same rate as sales.
Long-term debt will increase in direct relation to sales. Owners' equity will remain constant.

Question 30

A firm's external financing need is financed by which of the following?

retained earnings
net working capital and retained earnings net income and retained earnings
debt or equity
owners' equity, including retained earnings

Question 31
Sales can often increase without increasing which one of the following? Answer accounts receivable
cost of goods sold
accounts payable
fixed assets
inventory

Question 32
Blasco Industries is currently at full-capacity sales. Which one of the following is limiting sales to this level?

net working capital
long-term debt
inventory
fixed assets
debt-equity ratio

Question 33

All else constant, which one of the following will increase the internal rate of growth?
Answer decrease in the retention ratio
decrease in net income
increase in the dividend payout ratio
decrease in total assets increase in costs of goods sold

Question 34
The external financing need:

will limit growth if unfunded.
is unaffected by the dividend payout ratio.
must be funded by long-term debt.
ignores any changes in retained earnings.
considers only the required increase in fixed assets.

Question 35
Question Which one of the following will cause the sustainable growth rate to equal to internal growth rate?

dividend payout ratio greater than 1.0
debt-equity ratio of 1.0
retention ratio between 0.0 and 1.0 1
equity multiplier of 1.0
zero dividend payments

Question 36

The sustainable growth rate:

assumes there is no external financing of any kind.
assumes no additional long-term debt is available.
assumes the debt-equity ratio is constant.
assumes the debt-equity ratio is 1.0.
assumes all income is retained by the firm.

Question 37

Question If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income and excess capacity, then the:

maximum capacity level will have to increase at the same rate as sales growth.
total assets will have to increase at the same rate as sales growth.
debt-equity ratio will increase.
retained earnings will increase.
number of common shares outstanding will increase.

Question 38

Question Sal's Pizza has a dividend payout ratio of 10 percent. The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy. The firm is profitable. Which one of the following defines the maximum rate at which this firm can grow?

internal growth rate x (1 - 0.10)
sustainable growth rate x (1 - 0.10)
internal growth rate
sustainable growth rate
zero percent

Question 39

Question Which of the following can affect a firm's sustainable rate of growth?
I. capital intensity ratio
II. profit margin
III. dividend policy
IV. debt-equity ratio

Question 40

Financial plans generally tend to ignore which one of the following?

dividend policy
manager's goals and objectives
risks associated with cash flows
operating capacity levels
capital structure policy C mod6

Question 41

The financial planning process tends to place the least emphasis on which one of the following? Answer growth limitations
capacity utilization

market value of a firm
capital structure of a firm
dividend policy

Question 42

The financial planning process:
I. involves internal negotiations among divisions.
II. quantifies senior manager's goals.
III. considers only internal factors.
IV. reconciles company activities across divisions.

Answer III and IV only
II and III only
I I, II, and IV only II, Ill, and IV only
I, II, Ill, and IV

Question 43

Question A Procrustes approach to financial planning is based on:

a policy of producing a financial plan once every five years.
developing a plan around the goals of senior managers.
a proactive approach to the economic outlook.
a flexible capital budget.
a flexible capital structure.

Question 44

Question Fresno Salads has current sales of $4,900 and a profit margin of 6.5 percent. The firm estimates that
sales will increase by 5 percent next year and that all costs will vary in direct relationship to sales. What is the pro
forma net income?

$303.33
$327.18
$334.43
$338.70
$341.10

Question 45

Wagner Industrial Motors, which is currently operating at full capacity, has sales of $29,000, current assets of $1,600, current liabilities of $1,200, net fixed assets of $27,500, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 4.5 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

-$259.75
-$201.19
$967.30
$1,099.08
$1,515.25

Question 46

The Cookie Shoppe expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings?

$14,700
$17,500
$18,300
$20,600
$21,000

Question 47

Gladsden Refinishers currently has $21,900 in sales and is operating at 45 percent of the firm's capacity. What is the full capacity level of sales?

$31,755
$36,250
$48,667
$51,333
$54,500

Question 48

The Corner store has $219,000 of sales and $187,000 of total assets. The firm is operating at 87 the capital intensity ratio at full capacity?

0.62

0.68

0.74

1.35

1.47

Question 49

Miller Bros. Hardware is operating at full capacity with a sales level of $689,700 and fixed assets of $468,000. The profit margin is 7 percent. What is the required addition to fixed assets if sales are to increase by 10 percent?

$3,276
$4,680

$28,400

$32,760
$46,800

Question 50

Designer's Outlet has a capital intensity ratio of 0.87 at full capacity. Currently, total assets are $48,900 and current sales are $52,300. At what level of capacity is the firm currently operating?

89 percent
91 percent
93 percent
96 percent
98 percent

Question 51

Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current sales of $611,000. How much can the firm grow before any new fixed assets are needed?

4.99 percent
5.78 percent
6.02 percent
6.38 percent
6.79 percent

Question 52
Stop and Go has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The total asset turnover is 1.6 and the debt-equity ratio is 0.60. What is the sustainable rate of growth?
9.13 percent
9.54 percent

9.89 percent

10.26 percent

10.85 percent

Question 53

R. N. C., Inc. desires a sustainable growth rate of 4.5 percent while maintaining a 40 percent dividend payout ratio and a 6 percent profit margin. The company has a capital intensity ratio of 1.23. What equity multiplier is required to achieve the company's desired rate of growth?

1.33
1.38
1.42
1.47
1.53

Question 54

Question A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent. The capital intensity ratio is 1.2 and the debt-equity ratio is 0.64. What is the profit margin?

6.28 percent
7.67 percent
9.47 percent
12.38 percent
14.63 percent

Question 55

Question Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing. The firm maintains a constant debt-equity ratio of .0.55, a total asset turnover ratio of 1.30, and a profit margin of 9.0 percent. What must the dividend payout ratio be?
26.26 percent
38.87 percent
49.29 percent
61.13 percent

73.74 percent

Question 56

Question Cross Town Express has sales of $132,000, net income of $12,600, total assets of $98,000, and total equity of $45,000. The firm paid $7,560 in dividends and maintains a constant dividend payout ratio. Currently, the firm is operating at full capacity. All costs and assets vary directly with sales. The firm does not want to obtain any additional external equity. At the sustainable rate of growth, how much new total debt must the firm acquire?

$0
$4,311
$5,989
$6,207
$6,685

Question 57

The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio. What is the internal growth rate?

6.50 percent
6.75 percent 6.97 percent 7.24 percent 7.38 percent
Internal growth rate = (0.09 x 0.75)/[1 - (0.09 x 0.75)] = 7.24 percent
In Internal growth rate = (0.09 x 0.75)/[1 - (0.09 x 0.75)] = 7.24 percent

Question 58

The Dog House has net income of $3,450 and total equity of $8,600. The debt-equity ratio is 0.60 and the payout ratio is 20 percent. What is the internal growth rate?

14.47 percent
17.78 percent
1 25.09 percent

29.40 percent

33.33 percent

(refer the details of Major Manuscripts to questions 59-65)

Major Manuscripts, Inc.

2009 Income Statement

Net sales                                              $16,800

Cost of goods sold                               11,200

Depreciation                                         1,650

Earnings before interest and taxes         3,950

Interest paid                                        350

Taxable income                                       $3,500

Taxes                                                     _1,221

Net income                                             52.276

Dividends                                            $950

Major Manuscripts, Inc.

2009 Income Statement

 

2009

 

2009

Cash

$1,040

Accounts payable

$3,300

Accounts rec.

650

Long-term debt

2,780

Inventory

7,500

Common stock

10,000

Total

$9,190

Retained earnings

4510

Net fixed assets

11.400

 

 

Total assets

$1.0520

Total viabilities & equity

$20,590

Question 59

What is Major Manuscripts, Inc.'s retention ratio?

33 percent

40 percent

50 percent

60 percent

67 percent

Question 60

Major Manuscripts, Inc. does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm's maximum rate of growth?

7.44 percent
7.78 percent
9.26 percent
9.75 percent
10.90 percent

Question 61

If Major Manuscripts, Inc. decides to maintain a constant debt-equity ratio, what rate of growth can it maintain assuming that no additional external equity financing is available.

10.23 percent
10.49 percent
1 10.90 percent
11.27 percent
11.65 percent

Question 62

Major Manuscripts, Inc. is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 8 percent?

-$157

-$68

$241

$348

$367

Question 63

Major Manuscripts, Inc. is currently operating at 85 percent of capacity. All costs and net working capital vary directly with sales. The tax rate, the profit margin, and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 15 percent?

Answer -$810

-$756

-$642

$244

$358

Question 64

Assume the profit margin and the payout ratio of Major Manuscripts, Inc. are constant. If sales increase by 6 percent, what is the pro forma retained earnings?

Answer

$5,220.18
$5,721.42
$6,021.56

$6,648.42

$7,028.56

Question 65

Assume that Major Manuscripts, Inc. is currently operating at 95 percent of capacity and that sales are projected to increase to $20,000. What is the projected addition to fixed assets?

$0
$1,493

$1,529

$1,546

$1,588

(refer the details of Fake Stone to questions 66-74)

Fake Stone, Inc. 


2009 Income Statement


Net sales $23,600

Cost of goods sold 14,870

Question Depreciation 2,800

Earnings before interest and taxes 5,930

Interest paid 670

Taxable income $5,260

Taxes


Net income $3,420

Dividends $1,368





Fake Stone, Inc. 


2009 Balance Sheet



2009
2009
Cash 5930 Accounts payable $2,470
Accounts rec. 1,720 Long-term debt 8800
Inventory 5,210 Common stock 10,000
Total $5,860 Retained earning5, 4,190
Net fixed assets 19600

Total assets $25,460 Total liabilities & equity $25,460

Question 66

All of Fake Stone's costs and net working capital vary directly with sales. Sales are projected to increase by 3.5 percent. What is the pro forma accounts receivable balance for next year?

Answer
$1,659.80
$1,661.84
$1,780.20

$1,787.80

$1,800.46

Question 67

The profit margin, the debt-equity ratio, and the dividend payout ratio for Fake Stone, Inc. are constant. Sales are expected to increase by $1,062 next year. What is the projected addition to retained earnings for next year?

$92.34
$188.55
$1,909.16
$2,144.34
$2,386.08

Question 68

Assume that Fake Stone, Inc. is operating at full capacity. Also assume that all costs, net working capital, and fixed assets vary directly with sales. The debt-equity ratio and the dividend payout ratio are constant. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent?
$19,800
$21,070
$23,600
$24,240
$26,810

Question 69

Assume that Fake Stone, Inc. is operating at 88 percent of capacity. All costs and net working capital vary directly with sales. What is the amount of the pro forma net fixed assets for next year if sales are projected to increase by 13 percent?

$19,600
$20,406
$21,500
$21,667
$22,148

Question 70

Assume that Fake Stone, Inc. is operating at full capacity. Also assume that assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. What is the external financing need if sales increase by 12 percent?

$318.09
-$268.49
$103.13
$350.40
$460.56

Question 71

Fake Stone, Inc. is projecting sales to decrease by 4 percent next year while the profit margin remains constant. The firm wants to increase the dividend payout ratio by 2 percent. What is the projected increase in retained earnings for next year?

$1,711.15
$1,898.67
$1,943.65

$1,969.92

$2,105.63

Question 72

What is the internal growth rate of Fake Stone, Inc. assuming the payout ratio remains constant?

5.20 percent
5.55 percent
7.36 percent
7.49 percent
8.77 percent

Question 73

What are the pro forma retained earnings for next year if Fake Stone, Inc. grows at a rate of 2.5 percent and both the profit margin and the dividend payout ratio remain constant?

$4,946.90

$5,023.10

$5,592.20

$5,920.67

$6,293.30

Question 74

Assume that net working capital and all of the costs of Fake Stone, Inc. increase directly with sales. Also assume that the tax rate and the dividend payout ratio are constant. The firm is currently operating at full capacity. What is the external financing need if sales increase by 4 percent?

-$1,214.48
-$804.15

-$397.19

$201.16

$525.38

(refer the details of Hungry Howle to questions 75-80)

Hungry Howle's
2009 Income Statement

Net sales                                                 $17,300

Cost of goods sold                                    10,600

Depreciation                                              3,250

Earnings before interest and taxes.          3,450

Interest paid                                             680

Taxable income                                          $2,770

Taxes                                                        940

Net income                                                $1,830

Dividends                                                  $450
Addition to retained earnings                   $1,380

Hungry Howie's
2009 Balance Sheet

 

2009

 

2009

Cash

$350

Accounts payable

$1,920

Accounts rec.

 

Long-term debt

LSO

Inventory

2,360

Common stoE.14

7.500

Total

$3,650

Retained  earnings

1.580

Net fixed assets

10,850

 

 

Total assets

$14,500

Total liabilities & equity

$14,500

Question 75

Hungry Howie's is currently operating at 78 percent of capacity. What is the full-capacity level of sales?

$21,106.00
$21,580.62
$22,179.49

$24,506.17

$25,301.91

Question 76

Hungry Howie's is currently operating at 82 percent of capacity. What is the total asset turnover ratio at full capacity?
.68
.78
.95
1.29
1.46

Question 77

Hungry Howie's is currently operating at 96 percent of capacity. The profit margin and the dividend payout ratio are projected to remain constant. Sales are projected to increase by 3 percent next year. What is the projected addition to retained earnings for next year?

$1,309.19
$1,421.40
$1,884.90
$2,667.78
$3,001.40

Question 78

Hungry Howie's is currently operating at full capacity. The profit margin and the dividend payout ratio are held constant. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 11 percent. What is the external financing needed?

-$196.50
-$148.00
-$97.20
-$14.50
$26.80

Question 79

Hungry Howie's maintains a constant payout ratio. The firm is currently operating at full capacity. What is the maximum rate at which the firm can grow without acquiring any additional external financing?

9.74 percent
110.52 percent
11.06 percent
11.58 percent
12.23 percent

Question 80

Hungry Howie's is currently operating at 94 percent of capacity. What is the required increase in fixed assets if sales are projected to increase by 14 percent?
$0
$511
$633
$708

Question 81

Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth?

Working capital, fixed assets, and external financing must coordinate with and be able to support a firm's sales growth. If, for example, a projected increase in sales requires external financing when no such financing is available, then the firm cannot grow at the desired rate. Understanding the implications of both the internal and the sustainable growth rates helps managers understand the need to limit growth so that the firm does not attempt to outgrow its resources.

Question 82

Identify the four primary determinants of a firm's growth and explain how each factor could either add to or limit the growth potential of a firm.

The four factors are:

1) Profit margin Profits are internally generated and provide funding for growth. An increase in the profit margin increases a firm's ability to grow and vice versa.

2) Dividend policy Dividends are cash outflows that utilize cash that otherwise could fund company growth. A decrease in dividends increases a firm's ability to grow and vice versa.

3) Financial policy A firm's capital structure policy affects the amount of external debt and equity financing (3 firm is willing to accept An increase in external financing increases a firm's ability to grow. Areteictiort on external financing effectively limits the growth potential,

4) Total asset turnover The ability of a firm to acquire appropriate assets and efficiently manage those assets determines the amount of sales that can be generated for each dollar of assets obtained. Increasing the turnover rate increases a firm's ability to grow and vice versa.

Question 83

Question A) What are the assumptions that underlie the internal growth rate and B) what are the implications of this rate?

Question 84

Nelson's Landscaping Services just completed a pro forma statement using the percentage of sales approach. The pro forma has a projected external financing need of -$5,500. What are the firm's options in this case?

Question 85

Smith & Daughters is getting ready to compile pro forma statements for the next few years. How can the managers establish a reasonable range of growth rates that they should consider during this planning process?

Question 86

The most recent financial statements for Watchtower, Inc. are shown here (assuming no income taxes):

Income Statement                                                             Balance Sheet

Sales                     54400                                       Assets $9,110                  Debt $5,833

Costs                     2.624                                                                            Equity 3.277

Net income             $1,476                                      Total $9,110            Total $9,110

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's sales are projected to be $5,002. What is the amount of the external financing need?

Answer

$197
$203

$211

$218

$223

Question 87

The most recent financial statements for Last in Line, Inc. are shown here:

Income Staternent

Sales                                      $18500

Costs                                       14.800

Taxable Income                      3,700

Taxes (33%                              1,221

Net income                             $2,479

Balance Sheet

Assets $89,510                Debt $19530

                                       Equity 69.930

Total $89, S 10             Total 589,510

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $992 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $21,830. What is the amount of the external financing need?

Question 88

The most recent financial statements for 7 Seas, Inc. are shown here:

Income Statement

 

Balance Sheet

 

Sales

$4,800

Current assets

$6,084          Current abilities

$1,244

Costs

3,840

Fixed assets

5,183              Long-term debt

2,487

Taxable income

960

 

Equity

X36

Taxes (35%).

336

Total

$11267         Total

$11,267

Net income

$624

 

 

 

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. Like every other firm in its industry, next year's sales are projected to increase by exactly 16 percent. What is the external financing need?

$1,241.76

$1,411.16

$1,583.09

$2,211.87

$2,349.98

Question 89

The most recent financial statements for Benatar Co. are shown here:

Income Statement

 

Balance Sheet

 

Sales

$11,700,00

Current assets

512,436                Debt

$24,855

Costs

7.722.00

Fixed assets

30.447                    Equity

18.013

Taxable income

3,978.00

Total

$42,a83      Total

$42,883

Taxes (33%)-

1,312,74

 

 

 

Net income

52,65526

 

 

 

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external equity financing is possible. What is the internal growth rate?

Question 90:

Question: The most recent financial statements for Heng Co. are shown here:

Income Statement

Balance Sheet

 

Sales

555,000             Current assets

$25,730

Debt

$59,400

Costs

35,200                 Fixed assets

106.920

Equity

74 250

Taxable income

19,800          Total

S133,850

Total

$133,650

Taxes (34%)

6.732

 

 

 

Net income

$13,068

 

 

 

Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued?

$4,808.12
$5,211.17
$5,987.48
$6,493.74
$6,666.67

Question 91

Consider the income statement for Heir Jordan Corporation:

Income Statement

Sales                                        $26,000

Costs                                       10,400

Taxable i nco me                      $15,600

Taxes (35%)                            5.460

Net income                              $10,140

Dividends                                 53,448

Addition to retained earnings $6,692

A 22 percent growth rate in sales is projected. What is the pro forma addition to retained earnings assuming all costs vary proportionately with sales?

Answer

$6,299

$7,303

$7,890

$8,011

Question 92

The Soccer Shoppe has a 7 percent return on assets and a 25 percent payout ratio. What is its internal growth rate?

3.72 percent
4.08 percent
4.49 percent
5.23 percent
15.54 percent

Question 93

Question The Parodies Corp. has a 22 percent return on equity and a 23 percent payout ratio. What is its sustainable growth rate?

18.68 percent
19.25 percent
19.49 percent
1 20.39 percent

22.00 percent

Question 94

Question Consider the following information for Kaleb's Kickboxing:

Profit margin 8.8 percent 
Capital intensity ratio  0.54
Debt-equity ratio 0.6
Net income  $31,.000
Dividends  $15,810

What is the sustainable rate of growth?

Question 95

What is the sustainable growth rate assuming the following ratios are constant?

Total asset turnover           1.4.6

Profit margin                       8 percent

Equity multiplier                  1.20

Payout ratio                       32 percent

Answer

10.30 percent
10.53 percent

10.67 percent
10.89 percent
11.01 percent

Question 96

Seaweed Mfg., Inc. is currently operating at only 81 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed?

Answer

14.23 percent
14.47 percent
15.03 percent

22.87 percent

23.46 percent

Question 97

Seaweed Mfg., Inc. is currently operating at only 86 percent of fixed asset capacity. Fixed assets are $387,000. Current sales are $510,000 and are projected to grow to $664,000. What amount must be spent on new fixed assets to support this growth in sales?

$0
$22,654
$46,319

$79,408

$93,608

Question 98

Fixed Appliance Co. wishes to maintain a growth rate of 8 percent a year, a constant debt-equity ratio of 0.34, and a dividend payout ratio of 52 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve?

13.92 percent
14.46 percent
14.97 percent
15.33 percent
15.74 percent

Question 99

A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10 percent. What must the debt-equity ratio be if the firm wishes to keep that ratio constant?

0.05
0.40
0.55
0.60
0.95

Question 100

A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent. The current profit margin is 10 percent and the firm uses no external financing sources. What must the total asset turnover rate be?

0.87 times
0.90 times
1.01 times
1.15 times
1.30 times

Question 101

Based on the following information, what is the sustainable growth rate of Hendrix Guitars, Inc.?

Profit margin                   5.60 percent

Total it turnover              1.76

Total debt ratio               0.66

Payout ratio                  70 percent

Answer

7.68 percent
9.52 percent

11.12 percent
13.49 percent
14.41 percent

Question 102

Country Comfort, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000 and dividends were $44,640. What is the sustainable growth rate?

15.32 percent
15.79 percent
17.78 percent
18.01 percent
18.24 percent

Question 103

The most recent financial statements for Moose Tours, Inc. follow. Sales for 2009 are projected to grow by 16 percent. Interest expense will remain constant; the tax rate and dividend payout rate will also remain constant. Costs, other expenses, current assets, and accounts payable increase spontaneously will sales. If the firm is operating at full capacity and no new debt or equity is issued, how much external financing is needed to support the 16 percent growth rate in sales?

2008 Income Statement


 


Sales $9,100,000

Costs 709,000

Other expenses 11,0000,

Earning before interest and taxes  $190.00

Interest paid 20,900

Taxable income $169J00

Taxes (34%)  57,494

Net income  $111,606

Dividends  $44.64

Addition to retained t earnings $66.96





Balance Sheet as of December 31, 2008
Assets
Liabilities and Owners' Equity 
Current assets
Current liabilities
Cash 24,000 Accounts payable $66,000
Accounts receivable  41,000 Notes payable 10,000
Inventory 76,000 Total $764,000
Total $142,000.00 Long-term debt $142,000
Fixed assets
Owners' equity
Net plant and equipment $367,000 Common stock and paid-in surplus  $23,000
Total assets $509,000 Retained earnings 268,000


Total  291000


Total liabilities and owners' equity $509,000

Answer

$-10,246
-$8,122
-$6,708
$2,407
$3,309

Reference no: EM131530554

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