Chapter 04

Chapter 04 - Long-Term Financial Planning and GrowthChapter 04 Long-Term Financial Planning and Growth Multiple Choice Questions 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? A. financial range B. planning horizon C. planning agenda D. short-run E. current financing period 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? A. conjoining B. aggregation C. conglomeration D. appropriation E. summation 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? A. percentage of sales method B. sales dilution method C. sales reconciliation method D. common-size method E. trend method 4. Which one of the following terms is defined as dividends paid expressed as a percentage of net income? A. dividend retention ratio B. dividend yield C. dividend payout ratio D. dividend portion E. dividend section 5. Which one of the following correctly defines the retention ratio? A. one plus the dividend payout ratio B. addition to retained earnings divided by net income C. addition to retained earnings divided by dividends paid D. net income minus additions to retained earnings E. net income minus cash dividends 6. Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales? A. current ratio B. equity multiplier C. retention ratio D. capital intensity ratio E. payout ratio 7. The internal growth rate of a firm is best described as the: A. minimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. 8. The sustainable growth rate of a firm is best described as the: A. minimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. 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? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV 10. Financial planning: A. focuses solely on the short-term outlook for a firm. B. is a process that firms employ only when major changes to a firm's operations are anticipated. C. is a process that firms undergo once every five years. D. considers multiple options and scenarios for the next two to five years. E. provides minimal benefits for firms that are highly responsive to economic changes. Financial plans often contain alternative options based on economic developments. establishment of priorities IV. and IV only C. II. II. II. determination of asset requirements II. II. . C. I and III only B. I. III. Should additional shares of stock be sold? III. Financial planning for fixed assets is done on a segregated basis within each division. Financial plans assume that firms obtain no additional external financing. development of plans to contend with unexpected events III. and III only B. Financial planning accomplishes which of the following for a firm? I. I. Should a new product be introduced? A.11. E. and IV 12. I. II. I. and IV only E. Which one of the following statements concerning financial planning for a firm is correct? A. and III only E. I. I. III. Should a particular division be sold? IV. D. III. and IV only D. Financial plans frequently contain conflicting goals. The financial planning process is based on a single set of economic assumptions. III. III. and IV 13. analysis of funding options A. B. Which of the following questions are appropriate to address during the financial planning process? I. I. and IV only D. II. Should the firm merge with a competitor? II. II and IV only C. Which one of the following is correct in relation to pro forma statements? A. Pro forma statements must assume that no new equity is issued. III. and IV only 17. Fixed assets must increase if sales are projected to increase. Pro forma statements are limited to a balance sheet and income statement. managers: I. A. II. external financing need 15. current expenses C. 16. not guarantees. I. The addition to retained earnings is equal to net income plus dividends paid. II and III only C. and IV only E. C. consider the current production capacity level. III. Pro forma statements are projections. III. Pro forma financial statements must assume that no dividends will be paid. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity. D. Which one of the following statements is correct? A. can project both net income and net cash flows. II. IV. D. estimate company sales based on a desired level of net income and the current profit margin. B. Which one of the following are you most apt to estimate first as you begin this process? A. I and II only B. sales forecast D. Inventory changes are directly proportional to sales changes. C. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. E. consider only those assets that vary directly with sales. E. When utilizing the percentage of sales approach. Net working capital needs are excluded from pro forma computations. . B. fixed assets B. You are getting ready to prepare pro forma statements for your business. III and IV only D. projected net income E.14. E. varies only if the firm is producing at less than full capacity. 20. retained earnings. Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. C. When constructing a pro forma statement. remains fixed. Net working capital. The firm does not wish to obtain any additional equity financing. varies only if the firm maintains a fixed debt-equity ratio. C. currently has excess capacity. D. dividend policy D. The dividend payout ratio is constant at 40 percent. accounts payable. varies only if the firm is currently producing at full capacity. 21. Given this. capacity utilization policy . B. is projected to grow at the internal rate of growth. long-term debt. fixed assets. A firm is currently operating at full capacity. net working capital policy B. E.18. D. and all assets vary directly with sales. retains all of its net income. capital structure policy C. is projected to grow at the sustainable rate of growth. E. varies proportionally with sales. common stock. costs. you can safely assume that the firm: A. net working capital generally: A. D. that need will be met by: A. B. If the firm has a positive external financing need. 19. is currently operating at full capacity. capital budgeting policy E. A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. C. B. This information is primarily needed to project which one of the following account values when compiling pro forma statements? A. Net working capital and all costs vary directly with sales. D. The firm is currently operating at 85 percent of capacity. 23. The tax rate will increase at the same rate as sales. long-term debt 24. accounts receivable D. E. Total liabilities and owners' equity will increase by four percent. C.06 E.70 B. costs of goods sold C. A firm is operating at 90 percent of capacity. 1. The projected net income is equal to the current year's net income. B. fixed assets E. which one of the following statements must be true? A.86 C.00 D.15 .22. sales B. 1. 1. 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. Given this information. 0. Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of sales? A. 0. The tax rate and the dividend payout ratio are fixed. Total assets will increase by less than four percent. Retained earnings will increase by four percent over its current level. current sales III. Fixed assets must remain constant at the current level. equal to net income divided by the change in total equity. B. C. E. projected growth rate of sales A. 28. the change in retained earnings divided by the dividends paid. Which one of the following statements related to the firm's pro forma statements for next year must be correct? A. E. Which of the following are needed to determine the amount of fixed assets required to support each dollar of sales? I. The firm wants no additional external financing of any kind. The maximum rate of sales increase is 4 percent. II and IV only C. II. decrease in sales given a positive profit margin . III. and IV 26.25. Total liabilities will remain constant at this year's value. increase in corporate tax rates C. 27. D. The firm cannot exceed its internal rate of growth. A firm's net working capital and all of its expenses vary directly with sales. The plowback ratio is: A. decrease in the dividend payout ratio E. avoidance of external equity financing B. II. The firm is operating currently at 96 percent of capacity. B. I. and IV only E. the percentage of net income available to the firm to fund future growth. The projected owners' equity will equal this year's ending equity balance. I. current amount of fixed assets II. C. and III only D. reduction in the retention ratio D. I and III only B. the dollar increase in net income divided by the dollar increase in sales. III. II. D. Which one of the following will increase the maximum rate of growth a corporation can achieve? A. equal to one minus the retention ratio. current level of operating capacity IV. net income and retained earnings D. fixed assets E. owners' equity. D. debt or equity E. Retained earnings will increase at the same rate as sales. The tax rate and the dividend payout ratio will be held constant. inventory D.5 percent next year. The pro forma profit margin is equal to the current profit margin. Blasco Industries is currently at full-capacity sales. The interest expense will remain constant at its current level. cost of goods sold C. accounts payable D. Net working capital and operating costs are expected to increase directly with sales. E. 30. Sales can often increase without increasing which one of the following? A. Which one of the following statements is correct regarding the pro forma statement for next year? A. debt-equity ratio . long-term debt C. Martin Aerospace is currently operating at full capacity based on its current level of assets. Current and projected net income is positive. fixed assets E. B. Sales are expected to increase by 4. Long-term debt will increase in direct relation to sales. Owners' equity will remain constant. Total assets will increase at the same rate as sales.29. retained earnings B. inventory 32. Which one of the following is limiting sales to this level? A. accounts receivable B. including retained earnings 31. net working capital and retained earnings C. net working capital B. which is the firm's internal rate of growth. C. A firm's external financing need is financed by which of the following? A. C. . is unaffected by the dividend payout ratio.0. B.0 D. ignores any changes in retained earnings.0 E. considers only the required increase in fixed assets. decrease in net income C. assumes all income is retained by the firm. dividend payout ratio greater than 1. which one of the following will increase the internal rate of growth? A.0 B. assumes the debt-equity ratio is constant. assumes the debt-equity ratio is 1. decrease in total assets E. 35.33. increase in costs of goods sold 34. E. debt-equity ratio of 1. The sustainable growth rate: A.0 and 1. increase in the dividend payout ratio D. must be funded by long-term debt. equity multiplier of 1. assumes no additional long-term debt is available.0 C. Which one of the following will cause the sustainable growth rate to equal to internal growth rate? A. zero dividend payments 36. retention ratio between 0. E. assumes there is no external financing of any kind. B. All else constant. decrease in the retention ratio B. D. D. C. will limit growth if unfunded. The external financing need: A. and IV only E. manager's goals and objectives C. total assets will have to increase at the same rate as sales growth. D. C. debt-equity ratio will increase. zero percent 39. Which of the following can affect a firm's sustainable rate of growth? I. 38. The firm is profitable. Financial plans generally tend to ignore which one of the following? A. sustainable growth rate E. 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.0. II. and has positive net income and excess capacity. internal growth rate  (1 . Which one of the following defines the maximum rate at which this firm can grow? A. internal growth rate D. I.10) C. retained earnings will increase. I.0. II. B. capital structure policy . and IV 40. E. dividend policy B. number of common shares outstanding will increase. and IV only D.37. sustainable growth rate  (1 . III only B. II. III. operating capacity levels E. dividend policy IV. debt-equity ratio A. I and III only C. profit margin III. If a firm equates its pro forma sales growth to the rate of sustainable growth. maximum capacity level will have to increase at the same rate as sales growth. capital intensity ratio II.10) B. then the: A. III. Sal's Pizza has a dividend payout ratio of 10 percent. risks associated with cash flows D. reconciles company activities across divisions. A Procrustes approach to financial planning is based on: A.41. Fresno Salads has current sales of $4. I. $338. growth limitations B. The firm estimates that sales will increase by 5 percent next year and that all costs will vary in direct relationship to sales.5 percent. involves internal negotiations among divisions. a flexible capital budget.900 and a profit margin of 6.18 C. $341. I. and IV 43. II and III only C.43 D. E. II. a flexible capital structure.10 . II.70 E. II. IV. A. The financial planning process: I. The financial planning process tends to place the least emphasis on which one of the following? A. II. D. capital structure of a firm E. III. capacity utilization C. III. quantifies senior manager's goals. $303. III and IV only B. What is the pro forma net income? A. $334. a proactive approach to the economic outlook. III. and IV only E. a policy of producing a financial plan once every five years. dividend policy 42.33 B. considers only internal factors. C. and IV only D. developing a plan around the goals of senior managers. market value of a firm D. 44. $327. B. Sales are expected to increase by 4.600.667 D. shortterm liabilities.08 E. The firm does not pay any dividends. 0. 1.500 C. The Cookie Shoppe expects sales of $437. What is the projected increase in retained earnings? A. $18.300 D. The firm is operating at 87 percent of capacity.333 E.35 E. 0. $54. current assets of $1. 1. The firm has no long-term debt and does not plan on acquiring any. $21.000 of sales and $187.75 B.19 C. $51. What is the capital intensity ratio at full capacity? A. What is the full capacity level of sales? A. $31. -$259.900 in sales and is operating at 45 percent of the firm's capacity.600 E. 0.62 B.200. which is currently operating at full capacity.5 percent next year.45.47 .515.500. $14.755 B. and a 5 percent profit margin. has sales of $29.500 48.74 D. $48.30 D. current liabilities of $1. $967.000 47. $36.000 of total assets.500 next year. $1. $20.000. -$201. The Corner Store has $219. how much additional equity financing is required for next year? A.700 B.8 percent and the firm has a 30 percent dividend payout ratio. Wagner Industrial Motors. and costs vary directly with sales.099.68 C.25 46.250 C. If all assets. net fixed assets of $27. $1. $17. Gladsden Refinishers currently has $21. The profit margin is 4. 89 percent B. 9.276 B.6 and the debt-equity ratio is 0.79 percent 52. Designer's Outlet has a capital intensity ratio of 0.02 percent D.400 D.760 E. total assets are $48.300. $4. What is the sustainable rate of growth? A.78 percent C. $3. $32. 5. 9.85 percent . The profit margin is 7 percent. 6.38 percent E. 98 percent 51. 6. $46. 6.54 percent C.800 50.60. Stop and Go has a 4. At what level of capacity is the firm currently operating? A.000. Hardware is operating at full capacity with a sales level of $689. 10. The total asset turnover is 1. 93 percent D.87 at full capacity.49.99 percent B.13 percent B.000. 9. What is the required addition to fixed assets if sales are to increase by 10 percent? A. Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current sales of $611. Currently.26 percent E. 91 percent C. 10. Miller Bros.89 percent D.5 percent profit margin and a 15 percent dividend payout ratio. How much can the firm grow before any new fixed assets are needed? A. 4.680 C.900 and current sales are $52. $28. 96 percent E.700 and fixed assets of $468. 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? A. 1.33 B. 1.38 C. 1.42 D. 1.47 E. 1.53 54. 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? A. 6.28 percent B. 7.67 percent C. 9.47 percent D. 12.38 percent E. 14.63 percent 55. 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? A. 26.26 percent B. 38.87 percent C. 49.29 percent D. 61.13 percent E. 73.74 percent 56. 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? A. $0 B. $4,311 C. $5,989 D. $6,207 E. $6,685 57. The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio. What is the internal growth rate? A. 6.50 percent B. 6.75 percent C. 6.97 percent D. 7.24 percent E. 7.38 percent 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? A. 14.47 percent B. 17.78 percent C. 25.09 percent D. 29.40 percent E. 33.33 percent 59. What is Major Manuscripts, Inc.'s retention ratio? A. 33 percent B. 40 percent C. 50 percent D. 60 percent E. 67 percent How much additional debt is required if no new equity is raised and sales are projected to increase by 15 percent? A. How much additional debt is required if no new equity is raised and sales are projected to increase by 8 percent? A.75 percent E. what rate of growth can it maintain assuming that no additional external equity financing is available. The tax rate and the dividend payout ratio will remain constant. 10. the profit margin. -$68 C. 11.78 percent C. is currently operating at maximum capacity.27 percent E. decides to maintain a constant debt-equity ratio. Major Manuscripts. $358 . 11. 10. -$810 B. $348 E. and current liabilities vary directly with sales. -$157 B.90 percent 61. What is the firm's maximum rate of growth? A. Inc. does not want to incur any additional external financing. If Major Manuscripts. 10. assets.23 percent B. 7.49 percent C. Major Manuscripts. is currently operating at 85 percent of capacity. Inc. $244 E. -$756 C. Major Manuscripts. All costs. Inc. Inc. The dividend payout ratio is constant. All costs and net working capital vary directly with sales. $367 63.26 percent D. The tax rate. 10. 7. A. 9.60. 9.44 percent B.65 percent 62.90 percent D. $241 D. -$642 D. and the dividend payout ratio will remain constant. 021. Inc. $0 B. $5.588 .546 E. Assume that Major Manuscripts. $6. $1. $6. is currently operating at 95 percent of capacity and that sales are projected to increase to $20. If sales increase by 6 percent. $1.648. $1.028.220. What is the projected addition to fixed assets? A.721. $7. $5. what is the pro forma retained earnings? A.56 D. Inc. Assume the profit margin and the payout ratio of Major Manuscripts. are constant.64.000.493 C.529 D.18 B.42 E.42 C. $1.56 65. $1. What is the pro forma accounts receivable balance for next year? A. $1.80 E. $1.787.659.800. $1.20 D.66. Sales are projected to increase by 3. All of Fake Stone's costs and net working capital vary directly with sales.80 B.46 .5 percent.84 C. $1.661.780. 16 D. $21.67.08 68.55 C. $23. $22. Also assume that assets.40 E. $92. net working capital.800 B. -$268. $2.56 . costs.500 D. $21.09 B. $21.406 C. Inc.49 C.144.600 B. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7. Inc. What is the projected addition to retained earnings for next year? A.909. Assume that Fake Stone.5 percent? A. are constant. and fixed assets vary directly with sales. $1. Assume that Fake Stone. The dividend payout ratio is constant. $20. What is the external financing need if sales increase by 12 percent? A. Sales are expected to increase by $1. is operating at 88 percent of capacity. $103. $26.386. $188. What is the amount of the pro forma net fixed assets for next year if sales are projected to increase by 13 percent? A. The profit margin. Also assume that all costs.34 E.810 69. $460.600 D. and current liabilities vary directly with sales. $19. The debt-equity ratio and the dividend payout ratio are constant. Inc. $19. and the dividend payout ratio for Fake Stone. the debt-equity ratio. $24. All costs and net working capital vary directly with sales.148 70. is operating at full capacity. Assume that Fake Stone. Inc. is operating at full capacity.240 E.667 E. $350.062 next year. $2.070 C.34 B.13 D. -$318. 67 C.023.711.592. Inc. -$397. $5. -$804. $1. 8. The firm wants to increase the dividend payout ratio by 2 percent.71. Inc. $1.920.65 D.38 . $5.15 B.293.214.90 B. $2. What is the external financing need if sales increase by 4 percent? A. $201. Also assume that the tax rate and the dividend payout ratio are constant.49 percent E.20 D. 7. What are the pro forma retained earnings for next year if Fake Stone.898. $4. increase directly with sales.63 72. Fake Stone.19 D. is projecting sales to decrease by 4 percent next year while the profit margin remains constant. -$1.77 percent 73.943.67 E. $6. 5.20 percent B. 7. Inc. $1.92 E.946.5 percent and both the profit margin and the dividend payout ratio remain constant? A. $5.30 74.48 B. assuming the payout ratio remains constant? A. 5.105.55 percent C. $525. $1.969. The firm is currently operating at full capacity. What is the internal growth rate of Fake Stone.36 percent D. Assume that net working capital and all of the costs of Fake Stone. Inc.10 C.15 C.16 E. What is the projected increase in retained earnings for next year? A. grows at a rate of 2. 91 .75. $21.106. $21.506.49 D.00 B. What is the full-capacity level of sales? A.17 E.580.62 C.301. Hungry Howie's is currently operating at 78 percent of capacity. $25. $22. $24.179. Sales are projected to increase by 11 percent. 12. What is the external financing needed? A. Sales are projected to increase by 3 percent next year.90 D. 1.95 D.76. . The profit margin and the dividend payout ratio are projected to remain constant. What is the maximum rate at which the firm can grow without acquiring any additional external financing? A.06 percent D. Hungry Howie's is currently operating at full capacity.40 C. 1. -$97.884.80 79. .52 percent C. Hungry Howie's is currently operating at 96 percent of capacity. -$148. The profit margin and the dividend payout ratio are held constant.74 percent B. $1.58 percent E. The firm is currently operating at full capacity. $1.29 E.40 78.50 B. 9.001.19 B.78 C. $1. $2.23 percent . Net working capital and fixed assets vary directly with sales.46 77. 10. What is the total asset turnover ratio at full capacity? A. $3. $26. What is the projected addition to retained earnings for next year? A. 11.00 C.68 B. -$196.309.78 E. Hungry Howie's maintains a constant payout ratio. . -$14. 11. Hungry Howie's is currently operating at 82 percent of capacity.421.667.20 D.50 E. $511 C. Hungry Howie's is currently operating at 94 percent of capacity. $633 D. . Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth? 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.80. What is the required increase in fixed assets if sales are projected to increase by 14 percent? A. $708 E. $0 B. $777 Essay Questions 81. A) What are the assumptions that underlie the internal growth rate and B) what are the implications of this rate? .83. How can the managers establish a reasonable range of growth rates that they should consider during this planning process? Multiple Choice Questions 86. What are the firm's options in this case? 85. No dividends are paid. Next . are shown here (assuming no income taxes): Assets and costs are proportional to sales. The most recent financial statements for Watchtower.500. Nelson's Landscaping Services just completed a pro forma statement using the percentage of sales approach.84. Debt and equity are not. The pro forma has a projected external financing need of -$5. Inc. Smith & Daughters is getting ready to compile pro forma statements for the next few years. $218 E. $197 B. $223 .002. What is the amount of the external financing need? A. $203 C.year's sales are projected to be $5. $211 D. What is the external financing need? A.87. The most recent financial statements for 7 Seas. costs.76 B. Inc.809 E. $2.556 D.211.241. $2.830.333 C.583. $13. $1.87 E.16 C. Debt and equity are not.349. $14. $13. A dividend of $992 was paid.09 D. and current liabilities are proportional to sales.98 . The most recent financial statements for Last in Line. $12. Long-term debt and equity are not. $13. next year's sales are projected to increase by exactly 16 percent. are shown here: Assets and costs are proportional to sales. and the company wishes to maintain a constant payout ratio. The company maintains a constant 50 percent dividend payout ratio. What is the amount of the external financing need? A. $1. are shown here: Assets.357 88.411. Next year's sales are projected to be $21. Like every other firm in its industry. Inc.711 B. $1. 12 B. 3. $4. $5.89. 2. $6.211.74 E. $5.987. No external equity financing is possible.17 C.91 percent B.808.14 percent 90. The company maintains a constant 40 percent dividend payout ratio.44 percent C. The most recent financial statements for Benatar Co. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio.493. 4. 3. Debt and equity are not.666. 4. are shown here: Assets and costs are proportional to sales. The most recent financial statements for Heng Co. What is the internal growth rate? A.02 percent E. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued? A.67 .87 percent D.48 D. $6. are shown here: Assets and costs are proportional to sales. 18. 19.890 D.72 percent B.91.00 percent . 3. 22. $8. What is the pro forma addition to retained earnings assuming all costs vary proportionately with sales? A. $8. 4.303 C. 4.49 percent D.39 percent E.164 92. What is its internal growth rate? A.68 percent B.08 percent C. 19. Consider the income statement for Heir Jordan Corporation: A 22 percent growth rate in sales is projected. $7.011 E.49 percent D. The Soccer Shoppe has a 7 percent return on assets and a 25 percent payout ratio. 5. 20.25 percent C. What is its sustainable growth rate? A.23 percent E. $6. has a 22 percent return on equity and a 23 percent payout ratio. 5.54 percent 93.299 B. $7. The Parodies Corp. 22.53 percent C. 10. 15.23 percent B. Seaweed Mfg. Inc.30 percent B. Consider the following information for Kaleb's Kickboxing: What is the sustainable rate of growth? A.65 percent D.87 percent B. What is the maximum rate at which sales can grow before any new fixed assets are needed? A.01 percent 96.89 percent E.03 percent D. What is the sustainable growth rate assuming the following ratios are constant? A. Current sales are $550. 14. 14.. 11.47 percent C. 15.67 percent D.87 percent E. 15.94. is currently operating at only 81 percent of fixed asset capacity. 14. 23. 14. 10.42 percent E.000. 13. 10.29 percent C.58 percent 95. 10.46 percent . 0. 14.74 percent 99. 0.000 and are projected to grow to $664. is currently operating at only 86 percent of fixed asset capacity.33 percent E.92 percent B. The ratio of total assets to sales is constant at 1. and the profit margin is 10 percent.40 C. A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. Inc. 15. 1.34. 14.608 98. 15..95 100. 1. $46. and a dividend payout ratio of 52 percent.319 D. A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent. 0. What amount must be spent on new fixed assets to support this growth in sales? A. 0. What must the debt-equity ratio be if the firm wishes to keep that ratio constant? A. Fixed assets are $387.87 times B. 0.654 C.46 percent C.90 times C.000.408 E.3. Fixed Appliance Co. The ratio of total assets to sales is constant at 1.97. What profit margin must the firm achieve? A.97 percent D. 0.05 B.01 times D. Seaweed Mfg.30 times . $22. wishes to maintain a growth rate of 8 percent a year. What must the total asset turnover rate be? A. 1. $93. The current profit margin is 10 percent and the firm uses no external financing sources. $0 B.000. Current sales are $510. 0.55 D.60 E. a constant debtequity ratio of 0.15 times E. 13. $79. 000 at the beginning of the year. What is the sustainable growth rate? A. had equity of $150. 18.24 percent . 17. Net income for the year was $72.12 percent D. 18. the company had total assets of $195. 11.000 and dividends were $44.52 percent C. 15. 13. During the year. Inc.32 percent B. Based on the following information. the company sold no new equity.79 percent C.640.49 percent E. Inc. Country Comfort.? A. 14. what is the sustainable growth rate of Hendrix Guitars.01 percent E. 9.41 percent 102.000.101.68 percent B. 15. 7. At the end of the year.78 percent D. the tax rate and dividend payout rate will also remain constant. follow.407 E. $-10. how much external financing is needed to support the 16 percent growth rate in sales? A. other expenses. The most recent financial statements for Moose Tours. Sales for 2009 are projected to grow by 16 percent. and accounts payable increase spontaneously will sales.708 D. If the firm is operating at full capacity and no new debt or equity is issued.309 . $2. -$6. Inc.122 C. current assets. -$8.103. Interest expense will remain constant. $3. Costs.246 B. Chapter 04 Long-Term Financial Planning and Growth Answer Key . aggregation C. appropriation E. current financing period Refer to section 4.1 Topic: Aggregation .1 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. Phil is working on a financial plan for the next three years. financial range B. planning agenda D. short-run E. Atlas Industries combines the smaller investment proposals from each operational unit into a single project for planning purposes.Multiple Choice Questions 1. planning horizon C. conglomeration D. summation Refer to section 4. This process is referred to as which one of the following? A.1 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. conjoining B. This time period is referred to as which one of the following? A.1 Topic: Planning horizon 2. sales dilution method C. common-size method E. dividend payout ratio D. dividend portion E. trend method Refer to section 4.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. 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? A.3 Topic: Percentage of sales approach 4. percentage of sales method B. sales reconciliation method D.3 Topic: Dividend payout ratio . Which one of the following terms is defined as dividends paid expressed as a percentage of net income? A.3. dividend section Refer to section 4. dividend yield C. dividend retention ratio B.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. capital intensity ratio E.3 Topic: Retention ratio 6. addition to retained earnings divided by net income C. Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales? A. payout ratio Refer to section 4. current ratio B. one plus the dividend payout ratio B. net income minus additions to retained earnings E.5. retention ratio D.3 Topic: Capital intensity ratio . net income minus cash dividends Refer to section 4.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. equity multiplier C.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. addition to retained earnings divided by dividends paid D. Which one of the following correctly defines the retention ratio? A. minimum growth rate achievable assuming a 100 percent retention ratio. maximum growth rate achievable excluding external financing of any kind. E. B. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. The sustainable growth rate of a firm is best described as the: A. D. minimum growth rate achievable if the firm maintains a constant equity multiplier. Refer to section 4. C. maximum growth rate achievable excluding external financing of any kind.4 Topic: Internal growth rate 8. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. C. E.7.4 AACSB: N/A Difficulty: Basic Learning Objective: 4-3 Section: 4.4 AACSB: N/A Difficulty: Basic Learning Objective: 4-3 Section: 4. minimum growth rate achievable assuming a 100 percent retention ratio. D. B. Refer to section 4. maximum growth rate achievable with unlimited debt financing. The internal growth rate of a firm is best described as the: A.4 Topic: Sustainable growth rate . minimum growth rate achievable if the firm maintains a constant equity multiplier. maximum growth rate achievable with unlimited debt financing. Refer to section 4. I. I and IV only B. I.1 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4.9.1 Topic: Financial planning . How much new debt must be obtained? A. and IV only E. III. D. Financial planning: A. Which of the following questions will be considered as you develop this plan? I. Will dividends be paid to shareholders? IV. considers multiple options and scenarios for the next two to five years. is a process that firms undergo once every five years. II. Will additional fixed assets be required? III. II. You are developing a financial plan for a corporation. focuses solely on the short-term outlook for a firm. and IV Refer to the introduction to chapter 4 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: Introduction to chapter 4 Topic: Financial planning 10. III. E. provides minimal benefits for firms that are highly responsive to economic changes. B. II and III only C. C. How much net working capital will be needed? II. and IV only D. III. is a process that firms employ only when major changes to a firm's operations are anticipated. II and IV only C. II. III.1 Topic: Financial planning . and IV only C. III. Which of the following questions are appropriate to address during the financial planning process? I. Should a new product be introduced? A. I and III only B. establishment of priorities IV. Should the firm merge with a competitor? II.11. II. II. III. I. II. development of plans to contend with unexpected events III. I.1 Topic: Financial planning 12. I. Financial planning accomplishes which of the following for a firm? I.1 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. and IV only D. and IV only D. Should additional shares of stock be sold? III. and III only B. determination of asset requirements II. II. I. I. II.1 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. III. and IV only E. and IV Refer to section 4. and IV Refer to section 4. I. Should a particular division be sold? IV. III. I. and III only E. analysis of funding options A. E. D. C. external financing need Refer to section 4. Financial planning for fixed assets is done on a segregated basis within each division.1 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4.1 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. B. sales forecast D.1 Topic: Financial planning 14.1 Topic: Pro forma statement . Financial plans often contain alternative options based on economic developments. Refer to section 4. projected net income E. You are getting ready to prepare pro forma statements for your business. current expenses C.13. The financial planning process is based on a single set of economic assumptions. fixed assets B. Which one of the following statements concerning financial planning for a firm is correct? A. Financial plans frequently contain conflicting goals. Financial plans assume that firms obtain no additional external financing. Which one of the following are you most apt to estimate first as you begin this process? A. I and II only B. not guarantees. III. I. consider only those assets that vary directly with sales. managers: I. When utilizing the percentage of sales approach. IV.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. B. A. E. III and IV only D. II and III only C. consider the current production capacity level. and IV only E. and IV only Refer to section 4. Pro forma statements are projections. Pro forma financial statements must assume that no dividends will be paid. II.2 Topic: Pro forma statements 16. Pro forma statements are limited to a balance sheet and income statement.15.2 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. III. Net working capital needs are excluded from pro forma computations. estimate company sales based on a desired level of net income and the current profit margin. Refer to section 4.3 Topic: Percentage of sales approach . III. C. II. Pro forma statements must assume that no new equity is issued. Which one of the following statements is correct? A. can project both net income and net cash flows. D. 17. B. remains fixed. Refer to section 4.3 Topic: Pro forma statement . D. B. Inventory changes are directly proportional to sales changes. net working capital generally: A. varies proportionally with sales. varies only if the firm maintains a fixed debt-equity ratio. The addition to retained earnings is equal to net income plus dividends paid. Refer to section 4. varies only if the firm is currently producing at full capacity.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4.3 Topic: Pro forma statements 18. Which one of the following is correct in relation to pro forma statements? A. varies only if the firm is producing at less than full capacity. E. E.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. When constructing a pro forma statement. D. Fixed assets must increase if sales are projected to increase. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity. C. C. Net working capital. currently has excess capacity. long-term debt. D. you can safely assume that the firm: A. is currently operating at full capacity. Refer to section 4. C. Refer to section 4. accounts payable. B. that need will be met by: A. and all assets vary directly with sales.3 Topic: Pro forma statement 20.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-2 Section: 4. E. E. fixed assets. B. A firm is currently operating at full capacity. The dividend payout ratio is constant at 40 percent. retained earnings. is projected to grow at the internal rate of growth. The firm does not wish to obtain any additional equity financing. costs. If the firm has a positive external financing need. retains all of its net income. D. common stock.19. C. Given this.3 Topic: External financing need . A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. is projected to grow at the sustainable rate of growth. Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. C. capital structure policy C. capacity utilization policy Refer to section 4. E. B. Net working capital and all costs vary directly with sales. The pro forma is based on a four percent increase in sales. Total liabilities and owners' equity will increase by four percent. dividend policy D. Refer to section 4. D.3 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-1 Section: 4.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. The projected net income is equal to the current year's net income. net working capital policy B. Total assets will increase by less than four percent.3 Topic: Pro forma statement . Given this information. Retained earnings will increase by four percent over its current level. The firm is currently operating at 85 percent of capacity.3 Topic: Pro forma statement 22.21. You are comparing the current income statement of a firm to the pro forma income statement for next year. The tax rate will increase at the same rate as sales. The tax rate and the dividend payout ratio are fixed. capital budgeting policy E. which one of the following statements must be true? A. 3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. 1. costs of goods sold C. 0. accounts receivable D.3 Topic: Pro forma statements 24. This information is primarily needed to project which one of the following account values when compiling pro forma statements? A.15 Refer to section 4.70 B. Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of sales? A.3 Topic: Capital intensity ratio .3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. 1.86 C. sales B. fixed assets E. A firm is operating at 90 percent of capacity.00 D.23. 1.06 E. 0. long-term debt Refer to section 4. I and III only B. C.3 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-1 Section: 4. equal to net income divided by the change in total equity. II and IV only C. I. the percentage of net income available to the firm to fund future growth. current sales III. and III only D. and IV only E. I. E. equal to one minus the retention ratio. II. the dollar increase in net income divided by the dollar increase in sales. Which of the following are needed to determine the amount of fixed assets required to support each dollar of sales? I. the change in retained earnings divided by the dividends paid. and IV Refer to section 4. III. The plowback ratio is: A. projected growth rate of sales A.3 Topic: Capital intensity ratio 26. Refer to section 4. III.3 Topic: Plowback ratio . current amount of fixed assets II. B.25. current level of operating capacity IV.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. II. II. D. D. B. Which one of the following statements related to the firm's pro forma statements for next year must be correct? A. The projected owners' equity will equal this year's ending equity balance. The firm cannot exceed its internal rate of growth. Refer to section 4. increase in corporate tax rates C. Total liabilities will remain constant at this year's value. A firm's net working capital and all of its expenses vary directly with sales. The firm wants no additional external financing of any kind.4 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-3 Section: 4. Fixed assets must remain constant at the current level. decrease in the dividend payout ratio E. Which one of the following will increase the maximum rate of growth a corporation can achieve? A.4 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-1 Section: 4. The firm is operating currently at 96 percent of capacity.4 Topic: Growth rates . E. C. reduction in the retention ratio D.4 Topic: Internal rate of growth 28. avoidance of external equity financing B. The maximum rate of sales increase is 4 percent.27. decrease in sales given a positive profit margin Refer to section 4. The tax rate and the dividend payout ratio will be held constant. Refer to section 4. net working capital and retained earnings C. The interest expense will remain constant at its current level. E. retained earnings B. owners' equity.5 percent next year. C.3 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-1 Section: 4. Owners' equity will remain constant. The pro forma profit margin is equal to the current profit margin.29. debt or equity E. Sales are expected to increase by 4. Which one of the following statements is correct regarding the pro forma statement for next year? A. Total assets will increase at the same rate as sales. which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales.3 Topic: External financing need .3 Topic: Pro forma statement 30. B. Current and projected net income is positive. A firm's external financing need is financed by which of the following? A.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-2 Section: 4. Long-term debt will increase in direct relation to sales. net income and retained earnings D. including retained earnings Refer to section 4. D. Retained earnings will increase at the same rate as sales. Martin Aerospace is currently operating at full capacity based on its current level of assets. 3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. long-term debt C. inventory Refer to section 4. debt-equity ratio Refer to section 4. net working capital B. fixed assets E. inventory D.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-1 Section: 4. Which one of the following is limiting sales to this level? A.3 Topic: Full capacity sales . fixed assets E. accounts receivable B. Sales can often increase without increasing which one of the following? A. Blasco Industries is currently at full-capacity sales. cost of goods sold C.31.3 Topic: Capacity level 32. accounts payable D. which one of the following will increase the internal rate of growth? A. D. ignores any changes in retained earnings. E. will limit growth if unfunded. increase in the dividend payout ratio D. C. All else constant. considers only the required increase in fixed assets. decrease in total assets E. decrease in net income C. The external financing need: A. decrease in the retention ratio B. is unaffected by the dividend payout ratio. increase in costs of goods sold Refer to section 4. Refer to section 4. must be funded by long-term debt.3 AACSB: N/A Difficulty: Basic Learning Objective: 4-2 Section: 4. B.33.4 Topic: Internal rate of growth 34.4 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-3 Section: 4.3 Topic: External financing need . 0 E. assumes no additional long-term debt is available. assumes the debt-equity ratio is constant. Which one of the following will cause the sustainable growth rate to equal to internal growth rate? A. assumes there is no external financing of any kind.0. B.4 Topic: Sustainable growth rate . dividend payout ratio greater than 1. The sustainable growth rate: A. E. C.0 and 1.0 B.4 Topic: Growth rates 36. equity multiplier of 1.4 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-3 Section: 4. assumes all income is retained by the firm. assumes the debt-equity ratio is 1. retention ratio between 0.0 C.4 AACSB: N/A Difficulty: Basic Learning Objective: 4-3 Section: 4. zero dividend payments Refer to section 4.0 D.35. debt-equity ratio of 1. D. Refer to section 4. B. If a firm equates its pro forma sales growth to the rate of sustainable growth. then the: A. E.4 Topic: Sustainable growth 38. C. Refer to section 4. and has positive net income and excess capacity. zero percent Refer to section 4. maximum capacity level will have to increase at the same rate as sales growth.4 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-3 Section: 4.0. internal growth rate D. Sal's Pizza has a dividend payout ratio of 10 percent. sustainable growth rate  (1 . The firm is profitable. total assets will have to increase at the same rate as sales growth. 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.0.4 AACSB: N/A Difficulty: Basic Learning Objective: 4-3 Section: 4. D. sustainable growth rate E.4 Topic: Sustainable growth rate . internal growth rate  (1 . debt-equity ratio will increase. retained earnings will increase. number of common shares outstanding will increase. Which one of the following defines the maximum rate at which this firm can grow? A.10) B.10) C.37. I.5 Topic: Financial plans . Financial plans generally tend to ignore which one of the following? A. I and III only C. dividend policy IV. II. II.4 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-3 Section: 4. risks associated with cash flows D. operating capacity levels E. II.5 AACSB: N/A Difficulty: Basic Learning Objective: 4-4 Section: 4. manager's goals and objectives C.4 Topic: Sustainable growth rate 40. dividend policy B. and IV only E. debt-equity ratio A. capital intensity ratio II. and IV Refer to section 4. III. capital structure policy Refer to section 4.39. III. I. III only B. Which of the following can affect a firm's sustainable rate of growth? I. profit margin III. and IV only D. 5 AACSB: N/A Difficulty: Intermediate Learning Objective: 4-4 Section: 4. market value of a firm D. dividend policy Refer to section 4. II. II and III only C. and IV Refer to section 4. II. and IV only D.5 Topic: Financial planning 42. quantifies senior manager's goals. I.5 AACSB: N/A Difficulty: Basic Learning Objective: 4-4 Section: 4. III. growth limitations B. considers only internal factors. II. A. capacity utilization C. IV. The financial planning process tends to place the least emphasis on which one of the following? A. involves internal negotiations among divisions. III. and IV only E. I. III and IV only B. reconciles company activities across divisions. II. The financial planning process: I. capital structure of a firm E.5 Topic: Financial planning process . III.41. 3 Topic: Pro forma income .05) = $334.10 Net income = $4.5 percent.70 E. $327.33 B.43 D.900 and a profit margin of 6. E.43 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4. a policy of producing a financial plan once every five years. What is the pro forma net income? A. a flexible capital budget. B. C. The firm estimates that sales will increase by 5 percent next year and that all costs will vary in direct relationship to sales.43.065  (1 + . a proactive approach to the economic outlook. developing a plan around the goals of senior managers. A Procrustes approach to financial planning is based on: A. D. Refer to section 4. $334. Fresno Salads has current sales of $4. a flexible capital structure. $338.18 C. $341.900  .5 Topic: Procrustes approach 44. $303.5 AACSB: N/A Difficulty: Basic Learning Objective: 4-4 Section: 4. $967. current assets of $1. $1.05  1.254 Current equity = $1.08 E.25 = -$259.500)  1.2 Topic: Equity financing 46.200 = $27. The firm has no long-term debt and does not plan on acquiring any.500 C. which is currently operating at full capacity.045 = $1. $21.000.515.500 next year.600 + $27. shortterm liabilities. and costs vary directly with sales.600 + $27.0.8 percent and the firm has a 30 percent dividend payout ratio.500 .$1.000  .000 Change in retained earnings = $437. and a 5 percent profit margin.900 . $14.099.$27.25 Equity funding need = $30. net fixed assets of $27.500. The firm does not pay any dividends.700 B.19 C.700 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.25 Projected assets = ($1. If all assets.50 Projected liabilities = $1. The profit margin is 4.30 D. $20.5 percent next year. $17.$1.45.75 AACSB: Analytic Difficulty: Basic Learning Objective: 4-2 Section: 4.048  (1 .515. how much additional equity financing is required for next year? A.30) = $14.409.$1. $1.515. $18.600.045 = $30.254 .900 Projected increase in retained earnings = $29. -$259. What is the projected increase in retained earnings? A.300 D.3 Topic: Retained earnings . -$201.045 = $1. Wagner Industrial Motors.500  .409. The Cookie Shoppe expects sales of $437.200.50 .75 B. current liabilities of $1. has sales of $29.200  1.600 E. Sales are expected to increase by 4. 900 in sales and is operating at 45 percent of the firm's capacity.45 = $48. 1.000/$251.74 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.667 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.724.62 B. What is the full capacity level of sales? A.74 D. The firm is operating at 87 percent of capacity. 1. 0.000 of sales and $187. 0. 0.000 of total assets. $54.500 Full-capacity sales = $21.68 C. $31.47.35 E.250 C.667 D.724.87 = $251.755 B. The Corner Store has $219. $51. $36.900/0.3 Topic: Full capacity sales 48.333 E.14 Capital intensity ratio = $187. Gladsden Refinishers currently has $21. $48.000/0.3 Topic: Capital intensity ratio .14 = 0.47 Full-capacity sales = $219. What is the capital intensity ratio at full capacity? A. 900/0.800 Required addition to fixed assets = $468. $4.680 C.10 = $46. Capital intensity ratio = $468. Miller Bros. 89 percent B.49.000  0.678556 = $46.276 B.700 and fixed assets of $468. At what level of capacity is the firm currently operating? A. $3. $46. Hardware is operating at full capacity with a sales level of $689.10  0. total assets are $48.700  0.800 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.300.3 Topic: Capacity level .900 and current sales are $52. 93 percent D. $32. 91 percent C.000/$689. Currently. The profit margin is 7 percent.206.400 D. Designer's Outlet has a capital intensity ratio of 0.300/$56. What is the required addition to fixed assets if sales are to increase by 10 percent? A.700 = 0.000.90 Current capacity utilization = $52. 96 percent E.87 = $56.760 E.206.678556 Required addition to fixed assets = $689.87 at full capacity.3 Topic: Fixed assets 50.800 Or. $28.90 = 93 percent AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-1 Section: 4. 98 percent Total capacity sales = $48. How much can the firm grow before any new fixed assets are needed? A. 5. 10.6 and the debt-equity ratio is 0. 4. 6.85 percent Return on equity = 0.5 percent profit margin and a 15 percent dividend payout ratio.60  (1 + 0. 9.38 percent E. Stop and Go has a 4.78 percent C. Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current sales of $611.38 percent AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-1 Section: 4.4 Topic: Sustainable growth . What is the sustainable rate of growth? A. 9. 10. 6.3 Topic: Capacity and growth 52.000 Maximum growth without additional assets = ($650.1 = 6.79 percent Full-capacity sales = $611.000.85 percent AACSB: Analytic Difficulty: Basic Learning Objective: 4-3 Section: 4.26 percent E.99 percent B. The total asset turnover is 1.13 percent B.02 percent D.000/$611.[.1152  (1 .51.15)]/{1 .0.1152  (1 .94 = $650.60. 6. 9.54 percent C.1152 Sustainable growth = [0.60) = 0.0.000/0.000) .89 percent D.045  1.15)]} = 10. 40)]/{1 .(ROE  0.129734 0.64.45]/[1 . 14. 7.5 percent while maintaining a 40 percent dividend payout ratio and a 6 percent profit margin.045 = [ROE  (1 .0.2 and the debt-equity ratio is 0.53 0.0. 1.28 percent B.06  (1/1. C. EM = 1.2 percent. 1. ROE = .[ROE  (1 .40)]}.42 D. N.53. PM = 14.47 E. 1. R.23)  EM.064). ROE = . A firm has a retention ratio of 45 percent and a sustainable growth rate of 6. The company has a capital intensity ratio of 1.47 percent D. 9. 6. What equity multiplier is required to achieve the company's desired rate of growth? A.4 Topic: Equity multiplier 54.4 Topic: Profit margin .129734 = PM  (1/1.38 percent E. desires a sustainable growth rate of 4.062 = [ROE  0. 1. Inc.38 C.23.47 AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-3 Section: 4. 12.63 percent AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-3 Section: 4. The capital intensity ratio is 1.33 B.2)  (1 + .67 percent C.07177 = 0.07177 0. What is the profit margin? A.63 percent 0. 1.45)].. 2626 Payout ratio = 1 .0 percent. 26.26 percent B.55.4 Topic: Payout ratio .(0.18135  b]/[1 . b = 0.30.87 percent C. Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing.0. and a profit margin of 9.18135 Sustainable growth = [0.0.55) = 0. What must the dividend payout ratio be? A.09  1.74 percent AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-3 Section: 4.2626 = 73. a total asset turnover ratio of 1. 38.55.74 percent Return on equity = 0.29 percent D. 49. 61. 73.13 percent E.18135  b)] = .30  (1 + 0. The firm maintains a constant debt-equity ratio of .05. 311 C.56.75 percent C.09  0.24 percent E.560 in dividends and maintains a constant dividend payout ratio.60 Retention ratio = 1 . total assets of $98. $5.560/$12.600 = 0.40) = $50. Cross Town Express has sales of $132.000  1. 7.35 Current debt = $98.68 Net debt required = $110. net income of $12. The firm paid $7.68 = $6. 6. All costs and assets vary directly with sales.600.75)] = 7. $6. 6.$50.000 + ($12.4 Topic: Internal growth rate .$45.000 . how much new total debt must the firm acquire? A. $6.685 AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-2 Section: 4.000 = $53. the firm is operating at full capacity.675.600/$45.000 Projected equity = $45.40]/{1 .360.(0.000)  0.360.[($12.38 percent Internal growth rate = (0.989 D.60 = 0.000. At the sustainable rate of growth. and total equity of $45.50 percent B.35 .126126  0.685 Dividend payout ratio = $7.000.40]} = 0.24 percent AACSB: Analytic Difficulty: Basic Learning Objective: 4-3 Section: 4.$53.126126 Projected total assets = $98. $4.09  0.675.4 Topic: External financing need 57.75)/[1 .600  1.000 . 7.000)  0.126126 = $110.40 Sustainable growth = [($12.0. The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio. $0 B. 6.97 percent D.207 E. Currently. The firm does not want to obtain any additional external equity. What is the internal growth rate? A.600/$45.000. 58.450 and total equity of $8.(. 29. The Dog House has net income of $3. What is the internal growth rate? A.09 percent AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-3 Section: 4.450/$13.0.33 percent Total assets = $8.47 percent B.250727  (1 .0.20)] = 25.250727  (1 .760 Return on assets = $3.600.60) = $13.250727 Internal growth = [.4 Topic: Internal growth rate .600  (1 + 0.60 and the payout ratio is 20 percent. 33. 14.09 percent D. 25. 17.40 percent E. The debt-equity ratio is 0.20]/[1 .760 = .78 percent C. 60 percent E. 67 percent Retention ratio = ($2. What is Major Manuscripts. Inc. 50 percent D. 40 percent C.'s retention ratio? A.$950)/$2.3 Topic: Retention ratio .59.376 = 60 percent AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.376 . 33 percent B. 376 = 0.26 percent D.[($2.60. decides to maintain a constant debt-equity ratio.510)]  0.000 + $4.23 percent B. 11.60]/{1 .60}/(expression error) = 10. The dividend payout ratio is constant. 10.590)  0. 9.65 percent Retention ratio = ($2.90 percent AACSB: Analytic Difficulty: Basic Learning Objective: 4-3 Section: 4.90 percent Retention ratio = ($2. what rate of growth can it maintain assuming that no additional external equity financing is available.376/($10.$950)/$2.376 . 10.376/$20.60 Sustainable growth rate = {[$2.$950)/$2. Major Manuscripts. 7.60 Internal growth rate = [($2. Inc.49 percent C.90 percent D.27 percent E. 10.376/$20. A.4 Topic: Internal growth rate 61.75 percent E.44 percent B.590)  0. 10.376 = 0.78 percent C. 7. 11. What is the firm's maximum rate of growth? A.376 . does not want to incur any additional external financing. 9.44 percent AACSB: Analytic Difficulty: Basic Learning Objective: 4-3 Section: 4.4 Topic: Sustainable growth rate .60]} = 7. Inc. If Major Manuscripts. $3.376 . Major Manuscripts. is currently operating at maximum capacity.300  1.237 .3 Topic: External financing need .050 = -$157 AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-2 Section: 4.780 Current common stock = $10.08 = $22. assets.000 Projected retained earnings = $4.$2. How much additional debt is required if no new equity is raised and sales are projected to increase by 8 percent? A. $241 D. $348 E.000 .510 + [($2.08] = $6.$10.$6. -$157 B.564 .590  1. and current liabilities vary directly with sales.564 Current long-term debt = $2.62. All costs.08 = $3.050 Additional debt required = $22. The tax rate and the dividend payout ratio will remain constant. $367 Projected total assets = $20. -$68 C. Inc.$950)  1.237 Projected accounts payable = $3.780 . 780 Current common stock = $10.56 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.780 . Assume the profit margin and the payout ratio of Major Manuscripts. How much additional debt is required if no new equity is raised and sales are projected to increase by 15 percent? A.9775 (Will not exceed excess capacity. and the dividend payout ratio will remain constant.90 = $756 AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-2 Section: 4. the profit margin. $5.$3. is currently operating at 85 percent of capacity. Major Manuscripts. All costs and net working capital vary directly with sales.021. -$756 C.$950)  1.56 D. Inc.795 .300  1.15] = $6. what is the pro forma retained earnings? A. $358 Projected current assets = $9.) Projected fixed assets = $11.50 Projected capacity level = 0.56 Pro forma retained earnings = $4. $6.376 .63. $6.000 .510 + [($2. $5.000 Projected retained earnings = $4.15 = $10. -$810 B. $244 E.510 + [($2.42 C. are constant.220.85  1.06)] = $6. If sales increase by 6 percent.3 Topic: Pro forma .$10.149.568. $7. Inc.90 Additional debt required = $10.$6.400 Projected accounts payable = $3. The tax rate.721.149.18 B.021.15 = 0.400 .648. -$642 D.190  1.795 Current long-term debt = $2.15 = $3.376 .$950)  1.028.42 E.$2.50 + $11.568.3 Topic: External financing need 64. 65. What is the projected addition to fixed assets? A.400/$17. Inc. $0 B.684.000] .493 AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-1 Section: 4.95 = $17.588 Current maximum capacity = $16.400 = $1.$11. $1. Assume that Major Manuscripts.684.000.21 Required addition to fixed assets = [($11.21)  $20. $1.529 D. $1.800/.546 E. $1. is currently operating at 95 percent of capacity and that sales are projected to increase to $20.3 Topic: Fixed assets .493 C. . $1. are constant.600]  ($3.909.062)/$23.20 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4. $1.08 Projected change in retained earnings = [($23.420 .659.800.84 C.661. and the dividend payout ratio for Fake Stone. $2.34 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4. What is the pro forma accounts receivable balance for next year? A.$1.55 C.144.780.062 next year.780. The profit margin.720  (1 + . $92.787. All of Fake Stone's costs and net working capital vary directly with sales.600 + $1.20 D. $188. $2. the debt-equity ratio.368) = $2. Sales are projected to increase by 3.3 Topic: Pro forma 67.34 B.46 Pro forma accounts receivable = $1.144.34 E.3 Topic: Retained earnings .66. $1. Inc. Sales are expected to increase by $1. What is the projected addition to retained earnings for next year? A.80 E.035) = $1.16 D. $1.5 percent. $1. $1.386.80 B. $20.68.800 B. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7. is operating at 88 percent of capacity.600 D.600. $19. No additional fixed assets are required. $19. $26. is operating at full capacity. and fixed assets vary directly with sales.240 E. $21. Also assume that all costs.5 percent? A. All costs and net working capital vary directly with sales.070 C. $24.3 Topic: Pro forma 69. Inc.810 Pro forma net fixed assets = $19. $23.13) = 99.148 Pro forma capacity level = 0. $21. Assume that Fake Stone. What is the amount of the pro forma net fixed assets for next year if sales are projected to increase by 13 percent? A.070 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.667 E.500 D. fixed assets will remain at $19. Assume that Fake Stone.44 percent.3 Topic: Fixed assets . The debt-equity ratio and the dividend payout ratio are constant.406 C. Inc.88  (1 + 0. $21. Thus.600  (1 + 0. $22. AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.600 B. net working capital.075) = $21. 15 B.800 .420)  1.190 [$3.65 D. $2.63 Projected dividend payout ratio = ($1. costs.49 C.67 C.3 Topic: Retained earnings .408 Retention ratio = 1 .420 .04)  0.0. $1.943.12  $2.592 Projected increase in retained earnings = $3.368  1.969. Also assume that assets.13 D. The dividend payout ratio is constant.$4. Inc.898. -$318. The firm wants to increase the dividend payout ratio by 2 percent.09 B. $350. and current liabilities vary directly with sales.592 = $1. is operating at full capacity. Assume that Fake Stone. Fake Stone.$10. What is the projected increase in retained earnings for next year? A. What is the external financing need if sales increase by 12 percent? A.470) .460) . Inc. $1.$1.56 External financing needed = (1.000 .420  (1 .4 Topic: External financing need 71.02 = 0.711.105. $460.65 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.12] = $460.0.(1. $103.12  $25.40 E. $1.92 E.70.943. -$268. $1.408 = 0. is projecting sales to decrease by 4 percent next year while the profit margin remains constant.56 AACSB: Analytic Difficulty: Basic Learning Objective: 4-2 Section: 4.368/$3.$8. $5.67 E. What are the pro forma retained earnings for next year if Fake Stone. $6.20 percent B.36 percent D. Inc. Inc.293.420)]}/(expression error) = 8. grows at a rate of 2.592.460)  [1 .420/$25.77 percent Internal growth = {($3. What is the internal growth rate of Fake Stone. $5.368)  1. $4. 8.023. 7.4 Topic: Internal growth rate 73. 7.920. assuming the payout ratio remains constant? A.20 D.946. 5.30 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.49 percent E.72.368/$3. $5.293.4 Topic: Retained earnings .77 percent AACSB: Analytic Difficulty: Basic Learning Objective: 4-3 Section: 4.90 B.10 C.025)] = $6. 5.420 .$1.5 percent and both the profit margin and the dividend payout ratio remain constant? A.30 Pro forma retained earnings = $4.($1.55 percent C.190 + [($3. -$1.$1.$2. The firm is currently operating at full capacity.568.15 C. $201.368)  1. $525.470  1.800 .$10.04 = $2. increase directly with sales.324. Assume that net working capital and all of the costs of Fake Stone.460  1.38 Projected total assets = $25. -$397.4 Topic: External financing need .74.08 = -$1.08 External financing need = $26. Also assume that the tax rate and the dividend payout ratio are constant.000 .40 Projected accounts payable = $2.48 B.16 E.190 + [($3.19 D.$6. What is the external financing need if sales increase by 4 percent? A.04] = $6.568. Inc.478.214.$8.80 .48 AACSB: Analytic Difficulty: Basic Learning Objective: 4-2 Section: 4.80 Projected retained earnings = $4.40 .04 = $26.420 .324. -$804.478.214. $21. What is the full-capacity level of sales? A.300/0.75.17 E.49 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.580. $21. $25.91 Full-capacity sales = $17. $22.106.506.3 Topic: Capacity level sales . Hungry Howie's is currently operating at 78 percent of capacity.179.179. $24.78 = $22.301.00 B.62 C.49 D. 76. 1.56/$14. . Sales are projected to increase by 3 percent next year.421. $1.300/0.95 D.78 E.097.884. Hungry Howie's is currently operating at 96 percent of capacity. $1.421. $3.001.19 B.68 B.46 AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-1 Section: 4.03) = $1.40 AACSB: Analytic Difficulty: Basic Learning Objective: 4-1 Section: 4.667. What is the projected addition to retained earnings for next year? A. .3 Topic: Total asset turnover 77.380  (1 + .46 Full-capacity sales = $17.78 C. $2.40 C. Hungry Howie's is currently operating at 82 percent of capacity. The profit margin and the dividend payout ratio are projected to remain constant.90 D.29 E.3 Topic: Retained earnings .097. 1. What is the total asset turnover ratio at full capacity? A.82 = $21.56 Total asset turnover at full-capacity = $21. $1.500 = 1. .40 Projected addition to retained earnings = $1.309. 830/$14. The firm is currently operating at full capacity.4 Topic: Internal growth rate .[($1.52 percent C.380/$1.$3.50 B.111.23 percent Internal growth = [($1.131. 11.095 .11 = $16.20 .500  1. -$14.50 E.74 percent B.830/$14. What is the maximum rate at which the firm can grow without acquiring any additional external financing? A.$3.80 = -$148 AACSB: Analytic Difficulty: Basic Learning Objective: 4-2 Section: 4.380  1.830)]} = 10.500 .58 percent E. 10.80 External financing need = $16. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 11 percent.$2.095 Projected accounts payable = $1. Hungry Howie's maintains a constant payout ratio. 11.111.$7. -$196.52 percent AACSB: Analytic Difficulty: Basic Learning Objective: 4-3 Section: 4.500)  ($1.500)  ($1.580 + ($1. 9.06 percent D.500 .131.380/$1.78.11 = $2.11) = $3. $26. The profit margin and the dividend payout ratio are held constant. What is the external financing needed? A.4 Topic: External financing need 79.830)]/{1 .20 D.20 Projected retained earnings = $1.80 Projected total assets = $14. -$97. Hungry Howie's is currently operating at full capacity.00 C. -$148. 12.920  1. and external financing must coordinate with and be able to support a firm's sales growth.4 AACSB: Reflective thinking Difficulty: Basic Learning Objective: 4-3 Section: 4.404.94 = $18. then the firm cannot grow at the desired rate. $511 C.14) . $777 Full-capacity sales = $17. Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth? Working capital. Feedback: Refer to section 4.3 Topic: Fixed assets Essay Questions 81.26 Required increase in fixed assets = ($10.850 = $777 AACSB: Analytic Difficulty: Intermediate Learning Objective: 4-1 Section: 4. $633 D.4 Topic: Growth limitations . $708 E. 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? A. a projected increase in sales requires external financing when no such financing is available.404. 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.300/.80.$10.300  1. for example. $0 B.850/$18.26)  ($17. fixed assets. If. 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.4 Topic: Determinants of growth .82.4 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 4-3 Section: 4. The four factors are: Feedback: Refer to section 4. 500. the firm might also use the extra funds to purchase fixed assets thereby increasing its maximum capacity level. the internal growth rate is the maximum rate of growth a firm can achieve based on internally generated funds. In other words. the firm has a surplus of funds that it can use to reduce current liabilities. A) What are the assumptions that underlie the internal growth rate and B) what are the implications of this rate? The basic assumptions are: Costs and net working capital increase proportionately with sales. Feedback: Refer to section 4.3 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 4-2 Section: 4. No additional external financing of any kind is permissible. or increase dividends. The pro forma has a projected external financing need of -$5. If acceptable opportunities exist. Feedback: Refer to section 4. Fixed assets also increase proportionately with sales once production reaches full capacity. should that need be anticipated. Nelson's Landscaping Services just completed a pro forma statement using the percentage of sales approach. buy back common stock. The dividend payout ratio is constant.3 Topic: External financing need .4 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 4-3 Section: 4. reduce long-term debt.4 Topic: Internal growth rate 84.83. The implication is that firms are limited to a rate of growth equal to the internal growth rate so long as external financing remains limited at its current level. What are the firm's options in this case? With a negative external financing need. 85. These growth rates effectively determine the range of rates than managers should consider. Feedback: Refer to section 4. How can the managers establish a reasonable range of growth rates that they should consider during this planning process? The internal growth rate establishes the minimum desired rate of growth while the sustainable growth rate identifies the maximum supportable level of growth.4 Topic: Growth rates . Smith & Daughters is getting ready to compile pro forma statements for the next few years.4 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 4-3 Section: 4. Multiple Choice Questions 86. The most recent financial statements for Watchtower, Inc. are shown here (assuming no income taxes): 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? A. $197 B. $203 C. $211 D. $218 E. $223 Sales increase = ($5,002 - $4,100)/$4,100 = 0.22 External financing need = $11,114 - $10,911 = $203 AACSB: Analytic Difficulty: Basic EOC #: 4-3 Learning Objective: 4-2 Section: 4.3 Topic: External financing need 357 AACSB: Analytic Difficulty: Basic EOC #: 4-4 Learning Objective: 4-2 Section: 4.$91. and the company wishes to maintain a constant payout ratio. Inc.333 C.357 Sales increase = ($21.622 . $12.$18.500 = 0. Debt and equity are not. are shown here: Assets and costs are proportional to sales. $13.809 E. $14.830 .556 D.18 External financing need = $105. A dividend of $992 was paid. The most recent financial statements for Last in Line. What is the amount of the external financing need? A.711 B.830. $13.265 = $14.3 Topic: External financing need . Next year's sales are projected to be $21.87. $13.500)/$18. are shown here: Assets.827. $2.3 Topic: External financing need .241. $1. Inc.211.583. Like every other firm in its industry.88. next year's sales are projected to increase by exactly 16 percent.09 D.76 AACSB: Analytic Difficulty: Basic EOC #: 4-5 Learning Objective: 4-2 Section: 4.349. What is the external financing need? A.98 External financing need = $13.241.16 C. and current liabilities are proportional to sales.96 = $1. Long-term debt and equity are not.$11.069. $1. $2. costs.87 E. The company maintains a constant 50 percent dividend payout ratio. The most recent financial statements for 7 Seas.72 .76 B.411. $1. 4. 3. 4. What is the internal growth rate? A.40)]/{1 . The company maintains a constant 40 percent dividend payout ratio.883)  (1 .89. Debt and equity are not.87 percent D.883)  (1 .665.26/$42. 3.87 percent AACSB: Analytic Difficulty: Basic EOC #: 4-6 Learning Objective: 4-3 Section: 4.[($2. 2.14 percent Internal growth rate = [($2. No external equity financing is possible.40)]} = 3.0.91 percent B.44 percent C.665. are shown here: Assets and costs are proportional to sales. The most recent financial statements for Benatar Co.0.02 percent E.4 Topic: Internal growth rate .26/$42. 493.176  .60 Sustainable growth rate = (0.17 C.60)] = .48 D.. are shown here: Assets and costs are proportional to sales. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued? A.176  .4 Topic: Sustainable growth rate . $4.12 B.118068 = $6. $5.74 E.60)/[1 .176 Retention ratio = 1 .74 AACSB: Analytic Difficulty: Basic EOC #: 4-8 Learning Objective: 4-3 Section: 4. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio.(0.000  .40 = . The most recent financial statements for Heng Co.250 = 0.068/$74.90.493. $6. $5.67 Return on equity = $13.118068 Maximum increase in sales = $55. $6.987.211.666.808. What is the pro forma addition to retained earnings assuming all costs vary proportionately with sales? A.299 B.303 C.3 Topic: Pro forma statement .164 Retention ratio = $6. Consider the income statement for Heir Jordan Corporation: A 22 percent growth rate in sales is projected.890 D.140 = . $7. $8.91.370. $6. $7.011 E.164 AACSB: Analytic Difficulty: Basic EOC #: 4-9 Learning Objective: 4-1 Section: 4. $8.65996 = $8.692/$10.65996 Pro forma addition to retained earnings = $12.80  . 23 percent E.23 = 0. 3. 20.77 Sustainable growth rate = (0.08 percent C.22  0. 22.39 percent AACSB: Analytic Difficulty: Basic EOC #: 4-13 Learning Objective: 4-3 Section: 4.75 Internal growth rate = (0.77)/[1 .77)] = 20.0.25 percent C.(0. 5. 4.07  0. 18.68 percent B. The Parodies Corp. has a 22 percent return on equity and a 23 percent payout ratio. 4.25 = 0.49 percent D. 19. What is its sustainable growth rate? A.75)/[1 .07  0.75)] = 5.4 Topic: Sustainable growth rate .22  0. The Soccer Shoppe has a 7 percent return on assets and a 25 percent payout ratio. 5.00 percent Retention ratio = 1 .(0.92.72 percent B.4 Topic: Internal growth rate 93.0.39 percent E.54 percent AACSB: Analytic Difficulty: Basic EOC #: 4-12 Learning Objective: 4-3 Section: 4.49 percent D. 19.54 percent Retention ratio = 1 . What is its internal growth rate? A. (.49 Sustainable growth rate = (.87 percent B.60) = 0.49)/[1 .4 Topic: Sustainable growth rate .54)  (1 + 0.2607  0.810/$31.000) = 0.65 percent AACSB: Analytic Difficulty: Basic EOC #: 4-14 Learning Objective: 4-3 Section: 4.49)] = 14. 14.088  (1/0.94. 15. 14. 13. 15.58 percent Return on equity = . Consider the following information for Kaleb's Kickboxing: What is the sustainable rate of growth? A.65 percent D.29 percent C.2607 Retention ratio = 1 .($15.42 percent E.2607  0. 67 percent D.68 Sustainable growth rate = (.68)/[1 .95. 10.000) .20 = 0.4 Topic: Sustainable growth rate 96.14016  0.3 Topic: Sales growth .23 percent B.46 percent Full capacity sales = $550.(0. is currently operating at only 81 percent of fixed asset capacity.53 percent C.68)] = 10. What is the maximum rate at which sales can grow before any new fixed assets are needed? A.01 percent Return on equity = . 11..012/$550.89 percent E.87 percent E.46  1. 22. 10. Inc.000/0. 14. 14.1 = 23. 10. What is the sustainable growth rate assuming the following ratios are constant? A. Current sales are $550.03 percent D.47 percent C.53 percent AACSB: Analytic Difficulty: Basic EOC #: 4-15 Learning Objective: 4-3 Section: 4. 10. 23.30 percent B.000.32 = 0.46 percent AACSB: Analytic Difficulty: Intermediate EOC #: 4-16 Learning Objective: 4-1 Section: 4.012 Maximum sales growth = (679. Seaweed Mfg.81 = $679.08  1.14016 Retention ratio = 1 .14016  0.0. 15. 3 Topic: Fixed asset need 98.48)/[1 . $93.1543 Return on equity = 0. $22. 13.319 D.4 Topic: Sustainable growth rate . 15. $79.000 = $46.52 = 0.34).000/$593.608 Full capacity sales = $510. Fixed Appliance Co.48)].000  0.86 = $593. Fixed assets are $387.46 percent C.000.97 percent AACSB: Analytic Difficulty: Intermediate EOC #: 4-18 Learning Objective: 4-3 Section: 4.654 C.1543 = PM  (1/1.26 Capital intensity ratio = $387.0. 14.97.(ROE  0.$387.48 Sustainable growth rate = 0.408 E. 15. What profit margin must the firm achieve? A. Inc. 14. is currently operating at only 86 percent of fixed asset capacity. The ratio of total assets to sales is constant at 1. Seaweed Mfg.023. and a dividend payout ratio of 52 percent.26 = 0. What amount must be spent on new fixed assets to support this growth in sales? A.652588231 Fixed asset need = ($664. Profit margin = 14.319 AACSB: Analytic Difficulty: Intermediate EOC #: 4-17 Learning Objective: 4-1 Section: 4.97 percent D.74 percent Retention ratio = 1 .000/0.34.08 = (ROE  0. $0 B. a constant debtequity ratio of 0.023.. ROE = 0. Current sales are $510. $46.3. wishes to maintain a growth rate of 8 percent a year.92 percent B.000.000 and are projected to grow to $664.3)  (1 + 0.33 percent E.652588231) . 01 times D.95 AACSB: Analytic Difficulty: Intermediate EOC #: 4-19 Learning Objective: 4-3 Section: 4.38 Sustainable growth rate = 0.(ROE  0.40 C.60 E.1949 Return on equity = 0. 0.38)]. 1.10  TAT. ROE = 0.76)/[1 .15 times E.1304 Return on assets = 0. What must the debt-equity ratio be if the firm wishes to keep that ratio constant? A. Total asset turnover = 1. 0. 0. 1. 1.95 Retention ratio = 1 .10  (1/1)  (1 + D/E). 0.08 = (ROE  0. 0.24 = 0.(ROA  0.90 times C.0.30 times Retention ratio = 1 . The current profit margin is 10 percent and the firm uses no external financing sources.55 D.76)].11 = (ROA  0.87 times B. What must the total asset turnover rate be? A.30 times AACSB: Analytic Difficulty: Intermediate EOC #: 4-20 Learning Objective: 4-3 Section: 4.76 Internal growth rate = 0.1304 = 0.99. 0.1949 = 0.0.4 Topic: Total asset turnover . D/E = 0.62 = 0. 0. and the profit margin is 10 percent. A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent.05 B. A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent.38)/[1 . ROA = 0. The ratio of total assets to sales is constant at 1.4 Topic: Debt-equity ratio 100. 0.66) .52 percent AACSB: Analytic Difficulty: Intermediate EOC #: 4-21 Learning Objective: 4-3 Section: 4.52 percent C. Based on the following information.7 = 0.056  1.941176) = 0. 7. 14. 13.66 D/E = 1/[(1/0.(0.66 1 + TD/TE = 1/0.68 percent B. 9.941176 Return on equity = 0.1] = 1.41 percent Total debt ratio = 0.289882 Retention ratio = 1 .? A. what is the sustainable growth rate of Hendrix Guitars.3)/[1 . Inc. 11.289882  0.3)] = 9.76  (1 + 1.289882  0.101.3 Sustainable growth rate = (0.4 Topic: Sustainable growth rate .49 percent E.66 = TD/TA TA/TD = 1/0.12 percent D. 17. Net income for the year was $72.38 Sustainable growth rate = (0.000. Country Comfort.79 percent C. 15.640) = $177.000 = 0. What is the sustainable growth rate? A. the company had total assets of $195.360 Return on equity = $72.38)/[1 .24 percent Ending equity = $150.000 and dividends were $44.000 at the beginning of the year.000 + ($72.$44.000 .360 = 0.38)] = 18.4060  0.24 percent AACSB: Analytic Difficulty: Intermediate EOC #: 4-23 Learning Objective: 4-3 Section: 4.4060  0. Inc.4060 Retention ratio = ($72.640.$44.32 percent B. 15.000 .000/$177.4 Topic: Sustainable growth rate . had equity of $150.01 percent E.102. 18.(0. At the end of the year.78 percent D. the company sold no new equity.640)/$72. During the year. 18. Inc. $2. Costs. $3. Sales for 2009 are projected to grow by 16 percent. the tax rate and dividend payout rate will also remain constant. The most recent financial statements for Moose Tours. other expenses.309 . $-10. If the firm is operating at full capacity and no new debt or equity is issued. -$8.246 B.708 D. Interest expense will remain constant.122 C. -$6.103.407 E. current assets. follow. and accounts payable increase spontaneously will sales. how much external financing is needed to support the 16 percent growth rate in sales? A. 122 AACSB: Analytic Difficulty: Intermediate EOC #: 4-25 Learning Objective: 4-2 Section: 4.606)  $131.3 Topic: External financing need 4-95 .002 Ending retained earnings = $268.Dividends = ($44.$52.440 .002 External financing need = $590.668 Addition to retained earnings = $131.670 = $52.562 = -$8.668 = $79.670 .$598.002 = $347.642/$111.000 + $79.