Long-Term Financial Planning and Growth

Question 1

Define Financial Planning

Answer 1

Financial planning formulates the way in which financial goals are to be achieved

Question 2

Dividend Payout Ratio

Answer 2

The amount of cash paid out to shareholders divided by net income

DPR= Cash dividends/Net Income

Question 3

Define Retention/Plowback Ratio

Answer 3

the addition to retained earnings divided by net income

1 - Dividend Payout ratio

If DPR is 1/3 then Plowback Ratio is the REMAINDER of the whole = 2/3

Question 4

Define Capital Intensity Ratio

Answer 4

Ratio of total assets to sales

Question 5

Define Internal Growth Rate

Answer 5

The maximum growth rate a firm can achieve without external financing

Internal growth rate = Ratio of Total Assets X Plowback Ratio / 1 (- Ratio of Total Assets X Plowback Ratio)

Question 6

Define Sustainable Growth Rate

Answer 6

The max growth a firm can achieve without external equity financing while maintaining a constant debt-equity ratio

Sustainable growth rate = Ratio of Equity X Plowback Ratio / 1 (- Ratio of Equity X Plowback Ratio)

Question 7

State the Determinants of Growth

Answer 7

• Profit margin
• Dividend policy
• Financial policy
• Total asset turnover

Question 8

Identify the basic idea behind the percentage of sales approach

Answer 8

To separate the income statement and balance sheet accounts into two groups, those that vary directly with sales and those that don’t

Question 9

Define EFN External Financing Needed

Answer 9

The difference between Increase in assets required and the addition to retained earnings

EFN = Increase in Assets required - Addition to retained earnings

Question 10

Define Capital Budgeting

Answer 10

The process of planning and managing a firm’s long term investments