Corporate finance 1

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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. Short answer questions (5)

1. What are the pros and cons of raising capital of enterprises through borrowing
from a bank?
2. Explain the sale approach to financial planning? What are the pros and cons of
this approach?
3. Using the sale approach, Tudo company just completed a pro forma with an
external financing need of +10 billion VND. What are the firm's options in this
case?
4. What is the implication of the internal rates of growth?
5. What is the implication of the sustainable rates of growth?

C. Multiple Choice Questions (10)

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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

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

D. Exercise: Đọc bài mẫu trong sách 9th edition

1. The most recent financial statements for GPS, Inc., are shown here:

Assets and costs are proportional to sales. Debt and equity are not. A dividend of
$1,400 was paid, and the company wishes to maintain a constant payout ratio. Next
year’s sales are projected to be $21,840. What is the external financing needed?
2. The most recent financial statements for Moose Tours, Inc., follow. Sales for 2009
are projected to grow by 20 percent. Interest expense will remain constant; the tax rate
and the dividend payout rate will also remain constant. Costs, other expenses, current
assets, and accounts payable increase spontaneously with sales. If the firm is operating
at full capacity and no new debt or equity is issued, what external financing is needed
to support the 20 percent growth rate in sales?
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3. Based on the following information, calculate the sustainable growth rate for
Kaleb’s Kickboxing:
Profit margin: 8.2%
Capital intensity ratio: 0.75
Debt–equity ratio: 0.4
Net income: $ 43.000
Dividends: $12.000

4. The most recent financial statements for Live Co. are shown here:
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Assets and costs are proportional to sales. Debt and equity are not. The company
maintains a constant 30 percent dividend payout ratio. No external equity financing is
possible. What is the internal growth rate? What is the sustainable growth rate?
5. Seaweed Mfg., Inc., is currently operating at only 95 percent of fixed asset
capacity. Current sales are $550,000. How fast can sales grow before any new
fixed assets are needed? Suppose fixed assets are $440,000 and sales are
projected to grow to $630,000. How much in new fixed assets are required to
support this growth in sales? Assume the company maintains its current
operating capacity