chapter 19 quiz

Question 1

. Dave’s Wax Inc.’s financial planners have projected a growth rate of 8% for the coming year. Currently, it has assets of $5,000,000 and retained earnings of $120,000. Calculate the amount of external financing Dave will need:
A. $0
B. $70,000
C. $184,000
D. $280,000

Answer 1

D. $280,000

Question 2

A forecast using a percentage of sales model expects sales to increase by 5% over each of the next four years. If costs are proportional to sales at 80%, and last year’s sales were $1,000, the net income in the fourth year will be:
A. $48.62
B. $145.86
C. $227.60
D. $243.10

Answer 2

D. $243.10

Question 3

Executives at Fruit Corporation forecast increased sales of 10% over the next year. $2,000,000 of assets will change in constant proportion to sales. If the addition to retained earnings is estimated to be $50,000, determine the required external financing.
A. $150,000
B. $200,000
C. $250,000
D. $300,000

Answer 3

B. $200,000

Question 4

With respect to the balance sheet, an increase in equity of $2,000 with an increase in net income to $2,500, leads us to believe:
A. The firm paid a dividend of $500
B. The firm plowed $500 back into the company
C. $500 went into retained earning
D. Debt increased by $2,000

Answer 4

B. the firm plowed $500 back into the company

Question 5

What new investment is required for a firm that projects 12% growth has $400,000 in assets, and retained earnings of $40,000?
A. $0
B. $4,800
C. $8,000
D. $66,667

Answer 5

A. $0

Question 6

. If a firm uses external financing as a plug item, has a new capital budget of $2 million, a net income of $3 million, and a plowback ratio of 40%, how much should be raised in external funds?
A. $200,000
B. $600,000
C. $800,000
D. $1,200,000

Answer 6

C. $800,000

Question 7

How will a percentage of sales models treat cost of goods sold if sales revenues are expected to grow by 20% to $1 million? Cost of goods sold will:
A. Grow at a slower rate than sales
B. Remain proportionate to sales
C. Be forecast to increase at the rate of inflation
D. Increase to $800,000

Answer 7

B. remain proportionate to sales

Question 8

Sources and uses of funds are made equal through:
A. A balancing item
B. Pro forma financial statements
C. Borrowing cash
D. Additions to retained earnings

Answer 8

A. a balancing item

Question 9

Which of the following might indicate the correct choice of a plug figure if a financial plan shows sources of funds to be $100,000 and uses of funds to be $90,000?
A. External debt must increase by $10,000
B. Dividend payments must decrease by $10,000
C. Cash balances must increase by $10,000
D. The capital budget must decrease by $10,000

Answer 9

A. external debt must increase by $10,000

Question 10

Which of the following is not a reason for building financial plans?
A. Considering options
B. Contingency planning
C. Choosing the optimal plan
D. Forcing consistency

Answer 10

A. considering options

Question 11

The phrase, “Forecasts do not develop in a vacuum,” is a reminder that:
A. Forecasters are known not to work well alone
B. Planners will offer ten plans when asked for one
C. Competitors also make plans and react to ours
D. Forecasts should be developed at headquarters

Answer 11

C. competitors also make plans and react to ours

Question 12

The outputs of a financial planning model often include:
A. The firm’s current financial statements
B. A range of macroeconomic forecasts
C. Cost projections for operating the planning models
D. Projected financial statements of the firm

Answer 12

D. projected financial statements of the firm

Question 13

The observation that additions to fixed assets are “lumpier” than additions to current assets indicates that:
A. Fixed assets depreciate over time
B. Fixed assets can only be acquired through external funding
C. Current assets can be acquired in smaller increments
D. Dollar for dollar, fixed assets are more expensive than current assets

Answer 13

C. current assets can be acquired in smaller increments

Question 14

. Firms that maintain a constant ratio of debt-equity over a variable business cycle may find that:
A. Debt has grown too large, too fast
B. It is more difficult to maintain a stable dividend
C. Debt covenants always accommodate more debt, but often prevent debt prepayment
D. Equity is always less expensive to obtain than debt

Answer 14

A. debt has grown too large, too fast

Question 15

. If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of.75 then:
A. Debt must increase by $300,000
B. Equity must increase by the full $400,000
C. Debt must increase by $171,429
D. Equity must increase by $100,000

Answer 15

C. debt must increase by $171,429

Question 16

A firm that wants to increase its sustainable growth rate can do so by __________ the __________ ratio or by __________ the __________ or both.
A. increasing; payout; increasing; ROE
B. increasing; plowback; increasing; ROE
C. decreasing; plowback; increasing; ROE
D. decreasing; payout; decreasing; ROE

Answer 16

B. icnreaasing;plowback;increasing;ROE

Question 17

A major difference between financial planning and forecasting is that financial planning:
A. Is forward-looking
B. Relies on the viewpoints of management
C. Determines the rate of profitability
D. Is equally concerned with less-likely outcomes

Answer 17

B. relies on the viewpoints of management

Question 18

If a firm’s dividend payout ratio is determined after achieving a specific capital structure, then:
A. Dividends are an input to the financial plan
B. The capital budget should be revised
C. Dividends are being used as a plug item
D. Dividend forecasts become crucial to planning

Answer 18

A. dividends are an input to the financial plan

Question 19

A firm’s internal growth rate of 10% means that:
A. Sales can grow by 10% before external equity is needed
B. Retained earnings can increase by 10% before total assets will change
C. External capital will not be required unless sales growth exceeds 10%
D. Debt can increase by 10% before retained earnings will fall

Answer 19

B. retained earnings can increase by 10% before total assets will change

Question 20

In a financial planning model:
A. Inputs are used to create the model
B. Financial ratios are used to create the model
C. Financial ratios are used to develop forecasts
D. Equations are used to develop financial statements

Answer 20

A. inputs are used to create the model

Question 21

Financial plans covering a short planning horizon rarely extend beyond:
A. one year
B. three years
C. five years
D. ten years

Answer 21

B. three years

Question 22

. Dividend policy is determined by all of the following except:
A. The debt-equity ratio
B. The need for funds
C. Forecasting
D. As a consequence of other planning decisions

Answer 22

A. the debt-equity ratio

Question 23

The rate at which the assets of a firm can grow without the requirement of external sources of financing is the:
A. Internal growth rate
B. Sustainable growth rate
C. Pro forma growth rate
D. Plowback rate

Answer 23

B. sustainable growth rate

Question 24

To avoid inconsistency, financial planners should be sure to:
A. Draw information from many resources
B. Do all forecasting themselves
C. Produce perfectly accurate forecasts
D. Use forecasts based on common macroeconomic assumptions

Answer 24

D. use forecasts based on common macroeconomic assumptions

Question 25

Planners have determined that sales will increase by 20% next year, and that the profit margin will remain at 10% of sales. Which of the following statements is correct?
A. Profit will grow by 20%
B. The profit margin will grow by 10%
C. Profit will grow proportionately faster than sales
D. 10% of the increase in sales will become net income

Answer 25

D. 10% of the increase in sales will become net income

Question 26

Pro forma statements are:
A. Plans developed by a Certified Financial Planner
B. The inputs in the financial planning process
C. Projected financial statements
D. Deviations in results from previous financial plans

Answer 26

C. projected financial statements

Question 27

All of the following are part of the financial planning process except:
A. Deciding which risks are worth taking
B. Analyzing investment and financing options
C. Projecting the future
D. Minimizing risk

Answer 27

A. deciding which risks are worth taking

Question 28

The final variable to have its value determined in a financial plan is often referred to as the:
A. Net income
B. Balancing item
C. Retained earning plowback
D. Growth forecast

Answer 28

B. balancing item

Question 29

Which of the following is correct when a firm’s pro forma statements project a net income of $5,000 and an external financing requirement of $2,000?
A. Dividends cannot exceed $3,000
B. Total assets cannot grow by more than $3,000
C. Retained earnings cannot grow by more than $5,000
D. The internal growth rate is 60%

Answer 29

B. total assets cannot grow by more than $3000

Question 30

. A firm has $1 million in current sales volume and an internal growth rate of 15%. If sales are expected to increase by $100,000, then:
A. The firm’s forecast will not be met
B. Dividends will have to be reduced
C. Retained earnings will increase by $50,000
D. External funding will not be required

Answer 30

C. retained earnings will increase by $50,000