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Chapter 4 Financial Planning _ Student version

Chapter 4 focuses on financial planning, including true/false and multiple choice questions related to concepts such as planning horizons, pro forma statements, and financial policies. Key topics include the percentage of sales method, retained earnings projections, and the implications of sales growth on financial statements. The chapter also presents scenarios for calculating equity financing needs and sustainable growth rates.

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16 views4 pages

Chapter 4 Financial Planning _ Student version

Chapter 4 focuses on financial planning, including true/false and multiple choice questions related to concepts such as planning horizons, pro forma statements, and financial policies. Key topics include the percentage of sales method, retained earnings projections, and the implications of sales growth on financial statements. The chapter also presents scenarios for calculating equity financing needs and sustainable growth rates.

Uploaded by

minhhue18405
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 4: Financial Planning

A. True/False Questions (5)

1. Phil is working on a financial plan for the next three years. This time period is
referred to planning horizon?
True
False

2. A percentage of sales method uses the projected sales level as the basis for
determining changes in balance sheet and income statement account values?
True
False

3. Financial planning is a process that firms undergo once every five years
True
False

4. Pro forma statements are limited to a balance sheet and income statement.
True
False

5. The plowback ratio is equal to net income divided by the change in total equity.
True
False

B. Multiple Choice Questions (10)

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

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2. 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. net working capital policy
B. capital structure policy
C. dividend policy
D. capital budgeting policy

3. 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.
A. I and II only
B. II and III only
C. III and IV only
D. I, III, and IV only

4. 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?

A. The pro forma profit margin is equal to the current profit margin.
B. Retained earnings will increase at the same rate as sales.
C. Total assets will increase at the same rate as sales.
D. Long-term debt will increase in direct relation to sales.

5. 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?
A. -$259.75
B. -$201.19
C. $967.30

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D. $1,099.08

6. 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?
A. $31,755
B. $36,250
C. $48,667
D. $54,500

7. Stop and Go has a 4.5 percent profit margin and an 18 percent dividend payout ratio.
The total asset turnover is 1.6 and the debt-equity ratio is 0.45. What is the
sustainable rate of growth?
A. 8.54 percent
B. 8.89 percent
C. 9.26 percent
D. 9.36 percent

8. 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. 61.13 percent
D. 73.74 percent

9. 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

10. Cross Town Express has sales of $137,000, net income of $14,000, 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

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B. $6,311
C. $6,989
D. $8,852

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