Chapter 4 Flashcards
(14 cards)
When utilizing the percentage of sales approach, managers:
A) Estimate company sales based on a desired level of net income and the current net profit margin.
B) Consider only the total bonds issued
C) Consider the current production capacity level.
D) Can project net income but not net cash flows.
E) Assume all liability accounts will remain constant.
C) Consider the current production capacity level.
Which ratio identifies the amount of total assets a firm needs in order to generate $1 in sales?
A. Return on assets
B. Equity multiplier
C. Retention ratio
D. Capital intensity ratio
E. Current ratio
D. Capital intensity ratio
Pro forma statements:
A. Must assume that no new equity is issued
B. Are projected estimates used for long term financial planning
C. Are limited to a balance sheet and income statement
D. Must assume that no dividends will be paid
E. Exclude net working capital needs
B. Are projected estimates used for long term financial planning
Which one of the following has the least effect on a firm’s sustainable rate of growth?
A. Capital intensity ratio
B. Net profit margin
C. Dividend policy
D. Debt-equity ratio
E. Quick ratio
E. Quick ratio
Green Giant has a 7 percent profit margin and a 66 percent dividend payout ratio. The total asset turnover is 1.60 times and the equity multiplier is 1.60 times. What is the sustainable rate of growth? ______
Hint ( Use Dupont Identity to figure out the ROE)
A) 17.92%
B) 10.38%
C) 24.14%
D) 6.49%
E) 2.56%
D) 6.49%
ROE= PMTAT EM
= .071.61.6=
SGR= ROEB/1-(ROEB)
Where B is the retention ratio which would be (1- Dividend payout ratio)
XYZ has the following financial information for 2018:
Sales = $2M, Net Inc. = $0.4M, Div. = $0.1M
C.A. = $0.4M, F.A. = $3.6M
C.L. = $0.2M, LTD = $1M, C.S. = $2M, R.E. = $0.3M
What is the internal growth rate for 2018
A) 11%
B) 10%
C) 8.11%
D) 6.49%
E) 4%
C) 8.11%
IGR= ROAB/1-(ROAB)
ROA= NI/TA= .4/4= .10 or 10%
Retention ratio= .75%
IGR= .10*.75/1- .0750= ——-
XYZ has the following financial information for 2018:
Sales = $2M, Net Inc. = $0.4M, Div. = $0.1M
C.A. = $0.4M, F.A. = $3.6M
C.L. = $0.2M, LTD = $1M, C.S. = $2M, R.E. = $0.3M
If 2019 sales are projected to be $2.4M, what is the amount of external financing needed, assuming XYZ is operating at full capacity, and profit margin and payout ratio remain constant?
A)2. 5m
B) 10m
C) .7m
D) 4.4m
E) .9m
E. 0.9m
2018 2019
Sales 2 2.4
NI= .4 .48m
Payout ratio= .1/.4= .25 or 25%
Retention ratio= ( 1- Payout ratio)= .75 or 75%
Retained earnings for 2019=.48*.75= .36
Balance Sheet:
Assets Liabilities
2018 2019 2018 2019
CA= .4 .48 CL .2 .24
FA= 3.6 4.32 LTd 1 1
TA= 4m 4.8 CS 2 2
RE 0.3 .66
Total ----------
External Funds needed = Assets- Liabilities
Which of the following questions should be considered when developing a corporation’s financial 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
E. I, II, III, and IV
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 six months
D. considers multiple options and scenarios.
E. provides minimal benefits for firms that are highly responsive to economic changes.
D. considers multiple options and scenarios.
Sweet Home Bakery has a return on assets of 10.9 percent, a return on equity of 16.7 percent, and a retention ratio of 40 percent. What is its sustainable growth rate?
A) 9.25%
B) 7.16%
C) 4.55%
D) 9.87%
E) 10%
B) 7.16%
Ace Custom Metal has annual sales of $56,900 and is currently operating at 86 percent of capacity. What is the level of sales at full capacity?
A. $48,934
B. $47,740
C. $66,163
D. $105,834
E. $64,866
C. $66,163
McCarty’s has annual sales of $40,934, depreciation of $3,100, interest paid of $750, cost of goods sold of $22,400, taxes of $3,084, and dividends paid of $4,060. The firm has total assets of $55,300 and total debt of $32,600. The firm wants to maintain a constant payout ratio but does not want to incur any additional external financing. What is the firm’s maximum rate of growth?
A) 15.79%
B) 16.18%
C) 11.49%
D) 9.03%
E) 13.97%
A) 15.79%
Shah Fabrication currently has $298,900 in sales and is operating at 86 percent of the firm’s capacity. The dividend payout ratio is 40 percent and cost of goods sold is $211,300. If the firm were to operate at full capacity, what would sales be?
A) $245,697.67
B) $208,534.88
C) $347,558.14
D) $211,300.00
E) $254,500.00
C) $347,558.14
The maximum rate of growth a corporation can achieve can be increased by:
A) avoiding new external equity financing.
B) increasing the corporate tax rate.
C) increasing the retention ratio.
D) increasing the dividend payout ratio.
E) increasing the sales forecast.
C) increasing the retention ratio.
