Chapter 4 Long-Term Financial Planning and Growth
1.
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Phil is working on a financial plan for the next three years. This time period is referred to as which one of the following?
E.
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current financing period
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2.
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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?
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3.
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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.
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percentage of sales method
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C.
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sales reconciliation method
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4.
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Which one of the following terms is defined as dividends paid expressed as a percentage of net income?
A.
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dividend retention ratio
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5.
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Which one of the following correctly defines the retention ratio?
A.
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one plus the dividend payout ratio
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B.
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addition to retained earnings divided by net income
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C.
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addition to retained earnings divided by dividends paid
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D.
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net income minus additions to retained earnings
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E.
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net income minus cash dividends
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6.
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Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?
D.
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capital intensity ratio
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7.
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The internal growth rate of a firm is best described as the:
A.
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minimum growth rate achievable assuming a 100 percent retention ratio.
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B.
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minimum growth rate achievable if the firm maintains a constant equity multiplier.
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C.
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maximum growth rate achievable excluding external financing of any kind.
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D.
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maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
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E.
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maximum growth rate achievable with unlimited debt financing.
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8.
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The sustainable growth rate of a firm is best described as the:
A.
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minimum growth rate achievable assuming a 100 percent retention ratio.
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B.
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minimum growth rate achievable if the firm maintains a constant equity multiplier.
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C.
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maximum growth rate achievable excluding external financing of any kind.
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D.
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maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
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E.
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maximum growth rate achievable with unlimited debt financing.
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9.
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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?
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10.
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Financial planning:
A.
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focuses solely on the short-term outlook for a firm.
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B.
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is a process that firms employ only when major changes to a firm's operations are anticipated.
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C.
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is a process that firms undergo once every five years.
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D.
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considers multiple options and scenarios for the next two to five years.
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E.
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provides minimal benefits for firms that are highly responsive to economic changes.
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11.
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Financial planning accomplishes which of the following for a firm?
I. determination of asset requirements
II. development of plans to contend with unexpected events
III. establishment of priorities
IV. analysis of funding options
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12.
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Which of the following questions are appropriate to address during the financial planning process?
I. Should the firm merge with a competitor?
II. Should additional shares of stock be sold?
III. Should a particular division be sold?
IV. Should a new product be introduced?
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13.
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Which one of the following statements concerning financial planning for a firm is correct?
A.
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Financial planning for fixed assets is done on a segregated basis within each division.
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B.
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Financial plans often contain alternative options based on economic developments.
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C.
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Financial plans frequently contain conflicting goals.
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D.
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Financial plans assume that firms obtain no additional external financing.
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E.
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The financial planning process is based on a single set of economic assumptions.
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14.
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You are getting ready to prepare pro forma statements for your business. Which one of the following are you most apt to estimate first as you begin this process?
E.
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external financing need
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15.
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Which one of the following statements is correct?
A.
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Pro forma statements must assume that no new equity is issued.
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B.
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Pro forma statements are projections, not guarantees.
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C.
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Pro forma statements are limited to a balance sheet and income statement.
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D.
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Pro forma financial statements must assume that no dividends will be paid.
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E.
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Net working capital needs are excluded from pro forma computations.
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16.
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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.
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17.
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Which one of the following is correct in relation to pro forma statements?
A.
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Fixed assets must increase if sales are projected to increase.
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B.
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Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity.
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C.
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The addition to retained earnings is equal to net income plus dividends paid.
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D.
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Long-term debt varies directly with sales when a firm is currently operating at maximum capacity.
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E.
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Inventory changes are directly proportional to sales changes.
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18.
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When constructing a pro forma statement, net working capital generally:
B.
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varies only if the firm is currently producing at full capacity.
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C.
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varies only if the firm maintains a fixed debt-equity ratio.
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D.
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varies only if the firm is producing at less than full capacity.
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E.
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varies proportionally with sales.
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19.
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A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume that the firm:
A.
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is projected to grow at the internal rate of growth.
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B.
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is projected to grow at the sustainable rate of growth.
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C.
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currently has excess capacity.
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D.
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is currently operating at full capacity.
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E.
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retains all of its net income.
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20.
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A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:
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21.
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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.
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net working capital policy
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B.
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capital structure policy
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D.
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capital budgeting policy
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E.
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capacity utilization policy
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22.
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You are comparing the current income statement of a firm to the pro forma income statement for next year. The pro forma is based on a four percent increase in sales. The firm is currently operating at 85 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, which one of the following statements must be true?
A.
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The projected net income is equal to the current year's net income.
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B.
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The tax rate will increase at the same rate as sales.
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C.
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Retained earnings will increase by four percent over its current level.
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D.
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Total assets will increase by less than four percent.
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E.
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Total liabilities and owners' equity will increase by four percent.
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23.
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A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of the following account values when compiling pro forma statements?
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24.
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Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of sales?
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25.
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Which of the following are needed to determine the amount of fixed assets required to support each dollar of sales?
I. current amount of fixed assets
II. current sales
III. current level of operating capacity
IV. projected growth rate of sales
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26.
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The plowback ratio is:
A.
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equal to net income divided by the change in total equity.
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B.
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the percentage of net income available to the firm to fund future growth.
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C.
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equal to one minus the retention ratio.
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D.
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the change in retained earnings divided by the dividends paid.
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E.
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the dollar increase in net income divided by the dollar increase in sales.
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27.
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A firm's net working capital and all of its expenses vary directly with sales. The firm is operating currently at 96 percent of capacity. The firm wants no additional external financing of any kind. Which one of the following statements related to the firm's pro forma statements for next year must be correct?
A.
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Total liabilities will remain constant at this year's value.
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B.
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The maximum rate of sales increase is 4 percent.
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C.
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The firm cannot exceed its internal rate of growth.
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D.
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The projected owners' equity will equal this year's ending equity balance.
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E.
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Fixed assets must remain constant at the current level.
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28.
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Which one of the following will increase the maximum rate of growth a corporation can achieve?
A.
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avoidance of external equity financing
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B.
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increase in corporate tax rates
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C.
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reduction in the retention ratio
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D.
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decrease in the dividend payout ratio
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E.
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decrease in sales given a positive profit margin
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29.
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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.
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The pro forma profit margin is equal to the current profit margin.
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B.
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Retained earnings will increase at the same rate as sales.
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C.
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Total assets will increase at the same rate as sales.
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D.
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Long-term debt will increase in direct relation to sales.
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E.
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Owners' equity will remain constant.
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30.
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A firm's external financing need is financed by which of the following?
B.
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net working capital and retained earnings
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C.
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net income and retained earnings
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E.
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owners' equity, including retained earnings
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31.
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Sales can often increase without increasing which one of the following?
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32.
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Blasco Industries is currently at full-capacity sales. Which one of the following is limiting sales to this level?
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33.
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All else constant, which one of the following will increase the internal rate of growth?
A.
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decrease in the retention ratio
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B.
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decrease in net income
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C.
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increase in the dividend payout ratio
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D.
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decrease in total assets
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E.
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increase in costs of goods sold
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34.
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The external financing need:
A.
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will limit growth if unfunded.
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B.
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is unaffected by the dividend payout ratio.
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C.
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must be funded by long-term debt.
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D.
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ignores any changes in retained earnings.
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E.
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considers only the required increase in fixed assets.
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35.
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Which one of the following will cause the sustainable growth rate to equal to internal growth rate?
A.
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dividend payout ratio greater than 1.0
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B.
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debt-equity ratio of 1.0
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C.
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retention ratio between 0.0 and 1.0
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D.
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equity multiplier of 1.0
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E.
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zero dividend payments
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36.
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The sustainable growth rate:
A.
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assumes there is no external financing of any kind.
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B.
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assumes no additional long-term debt is available.
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C.
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assumes the debt-equity ratio is constant.
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D.
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assumes the debt-equity ratio is 1.0.
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E.
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assumes all income is retained by the firm.
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37.
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If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income and excess capacity, then the:
A.
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maximum capacity level will have to increase at the same rate as sales growth.
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B.
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total assets will have to increase at the same rate as sales growth.
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C.
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debt-equity ratio will increase.
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D.
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retained earnings will increase.
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E.
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number of common shares outstanding will increase.
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38.
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Sal's Pizza has a dividend payout ratio of 10 percent. The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy. The firm is profitable. Which one of the following defines the maximum rate at which this firm can grow?
A.
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internal growth rate × (1 - 0.10)
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B.
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sustainable growth rate × (1 - 0.10)
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D.
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sustainable growth rate
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39.
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Which of the following can affect a firm's sustainable rate of growth?
I. capital intensity ratio
II. profit margin
III. dividend policy
IV. debt-equity ratio
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40.
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Financial plans generally tend to ignore which one of the following?
B.
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manager's goals and objectives
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C.
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risks associated with cash flows
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D.
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operating capacity levels
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E.
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capital structure policy
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41.
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The financial planning process tends to place the least emphasis on which one of the following?
C.
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market value of a firm
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D.
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capital structure of a firm
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42.
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The financial planning process:
I. involves internal negotiations among divisions.
II. quantifies senior manager's goals.
III. considers only internal factors.
IV. reconciles company activities across divisions.
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43.
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A Procrustes approach to financial planning is based on:
A.
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a policy of producing a financial plan once every five years.
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B.
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developing a plan around the goals of senior managers.
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C.
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a proactive approach to the economic outlook.
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D.
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a flexible capital budget.
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E.
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a flexible capital structure.
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44.
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Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income?
Net income = $6,000 × .065 × (1 + .04) = $405.60
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45.
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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?
Projected assets = ($1,600 + $27,500) × 1.045 = $30,409.50
Projected liabilities = $1,200 × 1.045 = $1,254
Current equity = $1,600 + $27,500 - $1,200 = $27,900
Projected increase in retained earnings = $29,000 × .05 × 1.045 = $1,515.25
Equity funding need = $30,409.50 - $1,254 - $27,900 - $1,515.25 = -$259.75
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46.
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The Cookie Shoppe expects sales of $437,500 next year. The profit margin is 5.3 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings?
Change in retained earnings = $437,500 × .053 × (1 - 0.30) = $16,231
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47.
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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?
Full-capacity sales = $21,900/0.45 = $48,667
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48.
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The Corner Store has $219,000 of sales and $193,000 of total assets. The firm is operating at 87 percent of capacity. What is the capital intensity ratio at full capacity?
Full-capacity sales = $219,000/0.87 = $251,724.14
Capital intensity ratio = $193,000/$251,724.14 = 0.77
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49.
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Miller Bros. Hardware is operating at full capacity with a sales level of $689,700 and fixed assets of $468,000. The profit margin is 7 percent. What is the required addition to fixed assets if sales are to increase by 10 percent?
Required addition to fixed assets = $468,000 × 0.10 = $46,800
Or, Capital intensity ratio = $468,000/$689,700 = 0.678556
Required addition to fixed assets = $689,700 × 0.10 × 0.678556 = $46,800
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50.
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Designer's Outlet has a capital intensity ratio of 0.92 at full capacity. Currently, total assets are $48,900 and current sales are $51,200. At what level of capacity is the firm currently operating?
Total capacity sales = $48,900/0.92 = $53,152.17
Current capacity utilization = $51,200/$53,152.17 = 96.3 percent
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51.
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Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current sales of $611,000. How much can the firm grow before any new fixed assets are needed?
Full-capacity sales = $611,000/0.94 = $650,000
Maximum growth without additional assets = ($650,000/$611,000) - 1 = 6.38 percent
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52.
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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?
Return on equity = 0.045 × 1.60 × (1 + 0.45) = 0.1044
Sustainable growth = [0.1044 × (1 - 0.18)]/{1 - [.1044 × (1 - 0.18)]} = 9.36 percent
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53.
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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?
0.045 = [ROE × (1 - 0.40)]/{1 - [ROE × (1 - 0.40)]}; ROE = .07177
0.07177 = 0.06 × (1/1.23) × EM; EM = 1.47
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54.
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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?
0.062 = [ROE × 0.45]/[1 - (ROE × 0.45)]; ROE = .129734
0.129734 = PM × (1/1.2) × (1 + .64); PM = 9.49 percent
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55.
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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?
Return on equity = 0.09 × 1.30 × (1 + 0.55) = 0.18135
Sustainable growth = [0.18135 × b]/[1 - (0.18135 × b)] = .05; b = 0.2626
Payout ratio = 1 - 0.2626 = 73.74 percent
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56.
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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?
Dividend payout ratio = $7,560/$14,000 = 0.54
Retention ratio = 1 - 0.54 = 0.46
Sustainable growth = [($14,000/$45,000) × 0.46]/{1 - [($14,000/$45,000) × 0.46]} = 0.167012
Projected total assets = $98,000 × 1.167012 = $114,367.22
Current debt = $98,000 - $45,000 = $53,000
Projected equity = $45,000 + ($14,000 × 1.167012 × 0.46) = $52,515.56
New debt required = $114,367.22 - $53,000 - $52,515.56 = $8,852
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57.
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The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio. What is the internal growth rate?
Internal growth rate = (0.09 × 0.75)/[1 - (0.09 × 0.75)] = 7.24 percent
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58.
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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 30 percent. What is the internal growth rate?
Total assets = $8,600 × (1 + 0.60) = $13,760
Return on assets = $3,450/$13,760 = .250727
Internal growth = [.250727 × (1 - 0.30]/[1 - (.250727 × (1 - 0.30)] = 21.29 percent
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59.
|
What is Major Manuscripts, Inc.'s retention ratio?
Retention ratio = ($2,600 - $950)/$2,600 = 63 percent
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60.
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Major Manuscripts, Inc. does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm's maximum rate of growth?
Retention ratio = ($2,600 - $950)/$2,600 = 0.63
Internal growth rate = [($2,600/$20,640) × 0.63]/{1 - [($2,600/$20,640) × 0.63]} = 8.69 percent
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61.
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If Major Manuscripts, Inc. decides to maintain a constant debt-equity ratio, what rate of growth can it maintain assuming that no additional external equity financing is available.
Retention ratio = ($2,600 - $950)/$2,600 = 0.63
Sustainable growth rate = {[$2,600/($10,000 + $4,510)] × 0.63}/{1-[2,600/(10,000+4,510) x 0.63]} = 12.83 percent
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62.
|
Major Manuscripts, Inc. is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 6 percent?
Projected total assets = $20,640 × 1.06 = $21,878
Projected accounts payable = $3,350 × 1.06 = $3,551
Current long-term debt = $2,780
Current common stock = $10,000
Projected retained earnings = $4,510 + [($2,600 - $950) × 1.06] = $6,259
Additional debt required = $21,878 - $3,551 - $2,780 - $10,000 - $6,259 = -$712
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63.
|
Major Manuscripts, Inc. is currently operating at 82 percent of capacity. All costs and net working capital vary directly with sales. The tax rate, the profit margin, and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 15 percent?
Projected current assets = $9,240 × 1.15 = $10,626
Projected capacity level = 0.82 × 1.15 = 0.943 (Will not exceed excess capacity.)
Projected fixed assets = $11,400
Projected accounts payable = $3,350 × 1.15 = $3,852.50
Current long-term debt = $2,780
Current common stock = $10,000
Projected retained earnings = $4,510 + [($2,600 - $950) × 1.15] = $6,407.5
Additional debt required = $10,626 + $11,400 - $3,852.5 - $2,780 - $10,000 - $6,407.5 = -$1,014
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64.
|
Assume the profit margin and the payout ratio of Major Manuscripts, Inc. are constant. If sales increase by 9 percent, what is the pro forma retained earnings?
Pro forma retained earnings = $4,510 + [($2,600 - $950) × 1.09)] = $6,308.50
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65.
|
Assume that Major Manuscripts, Inc. is currently operating at 97 percent of capacity and that sales are projected to increase to $20,000. What is the projected addition to fixed assets?
Current maximum capacity = $17,100/.97 = $17,628.87
Required addition to fixed assets = [($11,400/$17,628.87) × $20,000] - $11,400 = $1,533
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66.
|
All of Fake Stone's costs and net working capital vary directly with sales. Sales are projected to increase by 3.5 percent. What is the pro forma accounts receivable balance for next year?
Pro forma accounts receivable = $1,720 × (1 + .035) = $1,780.20
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67.
|
The profit margin, the debt-equity ratio, and the dividend payout ratio for Fake Stone, Inc. are constant. Sales are expected to increase by $1,062 next year. What is the projected addition to retained earnings for next year?
Projected change in retained earnings = [($23,600 + $1,062)/$23,600] × ($3,420 - $1,368) = $2,144.34
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68.
|
Assume that Fake Stone, Inc. is operating at full capacity. Also assume that all costs, net working capital, and fixed assets vary directly with sales. The debt-equity ratio and the dividend payout ratio are constant. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent?
Pro forma net fixed assets = $19,600 × (1 + 0.075) = $21,070
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69.
|
Assume that Fake Stone, Inc. is operating at 88 percent of capacity. All costs and net working capital vary directly with sales. What is the amount of the pro forma net fixed assets for next year if sales are projected to increase by 13 percent?
Pro forma capacity level = 0.88 × (1 + 0.13) = 99.44 percent.
No additional fixed assets are required. Thus, fixed assets will remain at $19,600.
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70.
|
Assume that Fake Stone, Inc. is operating at full capacity. Also assume that assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. What is the external financing need if sales increase by 12 percent?
External financing needed = (1.12 × $25,460) - (1.12 × $2,470) - $8,800 - $10,000 - $4,190 - [$3,420 - $1,368 × 1.12] = $460.56
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71.
|
Fake Stone, Inc. is projecting sales to decrease by 4 percent next year while the profit margin remains constant. The firm wants to increase the dividend payout ratio by 2 percent. What is the projected increase in retained earnings for next year?
Projected dividend payout ratio = ($1,368/$3,420) = 40% + 2% = 42%
Retention ratio = 1 - 0.42 = 0.58
Projected increase in retained earnings = $3,420 × (1 - 0.04) × 0.58 = $1,904.26
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72.
|
What is the internal growth rate of Fake Stone, Inc. assuming the payout ratio remains constant?
Internal growth = [($3,420/$25,460) × 0.6]/{1 - [($1,368/$3,420) × 0.6]} = 8.77 percent
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73.
|
What are the pro forma retained earnings for next year if Fake Stone, Inc. grows at a rate of 2.5 percent and both the profit margin and the dividend payout ratio remain constant?
Pro forma retained earnings = $4,190 + [($3,420 - $1,368) × 1.025)] = $6,293.30
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74.
|
Assume that net working capital and all of the costs of Fake Stone, Inc. increase directly with sales. Also assume that the tax rate and the dividend payout ratio are constant. The firm is currently operating at full capacity. What is the external financing need if sales increase by 4 percent?
Projected total assets = $25,460 × 1.04 = $26,478.40
Projected accounts payable = $2,470 × 1.04 = $2,568.80
Projected retained earnings = $4,190 + [($3,420 - $1,368) × 1.04] = $6,324.08
External financing need = $26,478.40 - $2,568.80 - $8,800 - $10,000 - $6,324.08 = -$1,214.48
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75-80
|
 
Hungry Howie's is currently operating at 80 percent of capacity. What is the full-capacity level of sales?
Full-capacity sales = $17,300/0.80 = $21,625.00
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76.
|
Hungry Howie's is currently operating at 84 percent of capacity. What is the total asset turnover ratio at full capacity?
Full-capacity sales = $17,300/0.84 = $20,595.24
Total asset turnover at full-capacity = $20,595.24/$14,550 = 1.42
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77.
|
Hungry Howie's is currently operating at 96 percent of capacity. The profit margin and the dividend payout ratio are projected to remain constant. Sales are projected to increase by 5 percent next year. What is the projected addition to retained earnings for next year?
Projected addition to retained earnings = $1,670 × (1 + .05) = $1,753.50
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78.
|
Hungry Howie's is currently operating at full capacity. The profit margin and the dividend payout ratio are held constant. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 9 percent. What is the external financing needed?
Projected total assets = $14,550 × 1.09 = $15,859.5
Projected accounts payable = $1,920 × 1.09 = $2,092.8
Projected retained earnings = $1,530 + ($1,670 × 1.09) = $3,350.3
External financing need = $15,859.5 - $2,092.8 - $3,600 - $7,500 - $3,350.3 = -$683.60
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79.
|
Hungry Howie's maintains a constant payout ratio. The firm is currently operating at full capacity. What is the maximum rate at which the firm can grow without acquiring any additional external financing?
Internal growth = [($2,120/$14,550) × ($1,670/$2,120)]/{1 - [($2,120/$14,550) × ($1,670/$2,120)]} = 12.97 percent
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80.
|
Hungry Howie's is currently operating at 96 percent of capacity. What is the required increase in fixed assets if sales are projected to increase by 14 percent?
Full-capacity sales = $17,300/.96 = $18,020.83
Required increase in fixed assets = ($10,850/$18,020.83) × ($17,300 × 1.14) - $10,850 = $1,024
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81.
|
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 $4,750. What is the amount of the external financing needed?
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82.
|
The most recent financial statements for Last in Line, Inc. are shown here:
Assets and costs are proportional to sales. Debt and equity are not. A dividend of $992 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $21,830. What is the amount of the external financing need?
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83.
|
The most recent financial statements for 7 Seas, Inc. are shown here:
Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. Like every other firm in its industry, next year's sales are projected to increase by exactly 16 percent. What is the external financing need?
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84.
|
The most recent financial statements for Benatar Co. are shown here:
Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external equity financing is possible. What is the internal growth rate?
Internal growth rate = [($2,665.26/$42,883) × (1 - 0.40)]/{1 - [($2,665.26/$42,883) × (1 - 0.40)]} = 3.87 percent
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85.
|
The most recent financial statements for Heng Co. are shown here:
Assets and costs are proportional to sales. The company maintains a constant 45 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued?
Return on equity = $13,068/$74,250 = 0.176
Retention ratio = 1 - .45 = .55
Sustainable growth rate = (0.176 × .55)/[1 - (0.176 × .55)] = .107174
Maximum increase in sales = $55,000 × .107174 = $5,894.60
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86.
|
Consider the income statement for Heir Jordan Corporation:
A 22 percent growth rate in sales is projected. What is the pro forma addition to retained earnings assuming all costs vary proportionately with sales?
|
87.
|
The Soccer Shoppe has a 9 percent return on assets and a 25 percent payout ratio. What is its internal growth rate?
Retention ratio = 1 - 0.25 = 0.75
Internal growth rate = (0.09 × 0.75)/[1 - (0.09 × 0.75)] = 7.24 percent
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88.
|
The Parodies Corp. has a 22 percent return on equity and a 23 percent payout ratio. What is its sustainable growth rate?
Retention ratio = 1 - 0.23 = 0.77
Sustainable growth rate = (0.22 × 0.77)/[1 - (0.22 × 0.77)] = 20.39 percent
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89.
|
Consider the following information for Kaleb's Kickboxing:
What is the sustainable rate of growth?
Return on equity = .088 × (1/0.62) × (1 + 0.60) = 0.2270968
Retention ratio = 1 - ($15,810/$31,000) = 0.49
Sustainable growth rate = (.2270968 × 0.49)/[1 - (.2270968 × 0.49)] = 12.52 percent
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90.
|
What is the sustainable growth rate assuming the following ratios are constant?
Return on equity = .08 × 1.46 × 1.20 = 0.14016
Retention ratio = 1 - 0.32 = 0.68
Sustainable growth rate = (.14016 × 0.68)/[1 - (0.14016 × 0.68)] = 10.53 percent
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91.
|
Seaweed Mfg., Inc. is currently operating at only 84 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed?
Full capacity sales = $550,000/0.84 = $654,761.90
Maximum sales growth = (654,761.90/$550,000) - 1 = 19.05 percent
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92.
|
Seaweed Mfg., Inc. is currently operating at only 86 percent of fixed asset capacity. Fixed assets are $387,000. Current sales are $510,000 and are projected to grow to $664,000. What amount must be spent on new fixed assets to support this growth in sales?
Full capacity sales = $510,000/0.86 = $593,023.26
Capital intensity ratio = $387,000/$593,023.26 = 0.652588231
Fixed asset need = ($664,000 × 0.652588231) - $387,000 = $46,319
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93.
|
Fixed Appliance Co. wishes to maintain a growth rate of 8 percent a year, a constant debt-equity ratio of 0.42, and a dividend payout ratio of 50 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve?
Retention ratio = 1 - 0.50 = 0.50
Sustainable growth rate = 0.08 = (ROE × 0.50)/[1 - (ROE × 0.50)]; ROE = 0.14815
Return on equity = 0.14815 = PM × (1/1.3) × (1 + 0.42); Profit margin = 13.56 percent
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94.
|
A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10 percent. What must the debt-equity ratio be if the firm wishes to keep that ratio constant?
Retention ratio = 1 - 0.62 = 0.38
Sustainable growth rate = 0.08 = (ROE × 0.38)/[1 - (ROE × 0.38)]; ROE = 0.1949
Return on equity = 0.1949 = 0.10 × (1/1) × (1 + D/E); D/E = 0.95
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95.
|
A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent. The current profit margin is 7 percent and the firm uses no external financing sources. What must the total asset turnover rate be?
Retention ratio = 1 - 0.24 = 0.76
Internal growth rate = 0.11 = (ROA × 0.76)/[1 - (ROA × 0.76)]; ROA = 0.1304
Return on assets = 0.1304 = 0.07 × TAT; Total asset turnover = 1.86 times
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96.
|
Based on the following information, what is the sustainable growth rate of Hendrix Guitars, Inc.?
Total debt ratio = 0.66 = TD/TA
TA/TD = 1/0.66
1 + TD/TE = 1/0.66
D/E = 1/[(1/0.66) - 1] = 1.941176
Return on equity = 0.056 × 1.76 × (1 + 1.941176) = 0.289882
Retention ratio = 1 - 0.7 = 0.3
Sustainable growth rate = (0.289882 × 0.3)/[1 - (0.289882 × 0.3)] = 9.52 percent
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97.
|
Country Comfort, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $63,000 and dividends were $44,640. What is the sustainable growth rate?
Ending equity = $150,000 + ($63,000 - $44,640) = $168,360
Return on equity = $63,000/$168,360 = 0.3742
Retention ratio = ($63,000 - $44,640)/$63,000 = 0.2914
Sustainable growth rate = (0.3742 × 0.2914)/[1 - (0.3742 × 0.2914)] = 12.24 percent
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98.
|
The most recent financial statements for Moose Tours, Inc. follow. Sales for 2009 are projected to grow by 16 percent. Interest expense will remain constant; the tax rate and dividend payout rate will also remain constant. Costs, other expenses, current assets, and accounts payable increase spontaneously will sales. If the firm is operating at full capacity and no new debt or equity is issued, how much external financing is needed to support the 16 percent growth rate in sales?
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