Questions in [New Questions]
1) When a firm makes decisions regarding its investment in inventory and accounts
receivable it is making a:
[A] capital budgeting decision.
[B] capital structure decision.
[C] financing decision.
[D] working capital decision.
[E] dividend policy decision.
2) Which of the following statements about financial planning are correct?
I. Financial planning provides the opportunity for a firm to develop, analyze, and compare
many different scenarios in a consistent way.
II. A financial plan makes explicit the consistency between planned growth and stated
financial policies.
III. One of the purposes of financial planning is to help avoid surprises and develop
contingency plans.
IV. Growth is the primary financial planning goal for any financial manager.
[A] I and III only
[B] II and III only
[C] I, II, and III only
[D] I, III, and IV only
[E] I, II, III, and IV
3) The _________ portion of a firm’s financial plan contains the firm’s dividend and debt
policies.
[A] sales forecast
[B] asset requirement
[C] financial requirements
[D] capital budgeting
[E] liquidity needs
4) A firm has current assets of $200, net fixed assets of $400, accounts payable of $150,
long-term debt of $150, equity of $300, sales of $2,000, costs of $1,500, and a tax rate of
34 percent. Assume costs and assets increase at the same rate as sales. Also assume that
40 percent of net income is retained. The current debt-equity ratio is considered optimal
and no new equity sales are possible. What is the maximum rate of growth given this
information?
[A] 17.5 percent
[B] 19.4 percent
[C] 21.4 percent
[D] 25.8 percent
[E] 46.8 percent
5) Actions that increase a firm’s ability to generate funds internally decrease its ability to
grow without obtaining external financing.
[A] True
[B] False
6) If your firm is currently operating at full capacity and you expect strong sales growth over
the next few years, you should:
[A] expect your assets to remain at their current levels.
[B] lower your dividend payout to accommodate the growth.
[C] put off any further financial planning until sales growth moderates.
[D] forecast the external financing needed for the period.
[E] expect the growth in retained earnings to outpace the growth in sales.
7) Which one of the following statements regarding financial planning is accurate?
[A] Financial planning insures a firm will not be surprised by unforeseen future events.
[B] By using financial planning, a firm can clearly identify its options for the coming fifteen
years.
[C] The use of financial planning allows a firm to eliminate the interactions between its
operating policies and its financing policies.
[D] Financial planning allows a firm to plan for the future in a systematic fashion.
[E] Financial planning takes the burden of managing the firm off of the financial manager
and places it all on the operations manager.
8) When a firm determines it has too little liquidity due to over investment in inventory, it is
making a _____ decision.
[A] capital budgeting
[B] capital structure
[C] financing
[D] working capital
[E] dividend policy
9) Pickup Industries has a profit margin of 15 percent and a dividend payout ratio of 40
percent. Last year’s sales were $600 million and total assets were $400 million. None of the
liabilities vary directly with sales, but assets and costs do. If the growth rate for Pickup is 20
percent, how much external financing is needed?
[A] $5.2 million
[B] $13.1 million
[C] $15.2 million
[D] $21.3 million
[E] $26.0 million
10) Sales growth:
[A] will typically lead to growth in current assets.
[B] will automatically lead to increases in long term debt.
[C] is the least important item to forecast in the financial planning process.
[D] will always require additions to net fixed assets for firms operating at less than full
capacity.
[E] of less than 10 percent will make the external funds needed negative, creating a
surplus.
11) To reduce the amount of external financing needed, a firm may need to lower its rate of
growth.
[A] True
[B] False
12) A firm has net income of $150, total assets of $1,000 and total liabilities of $400. The
total asset turnover is 4.0.What is the firm’s capital intensity ratio?
[A] 0.00
[B] 0.25
[C] 0.50
[D] 2.00
[E] 4.00
13) All else equal, the level of external financing need (EFN) increases with increases in
the:
[A] profit margin.
[B] retention ratio.
[C] accounts receivable turnover ratio.
[D] capital intensity ratio.
[E] fixed asset utilization ratio.
14) Which of the following are basic policy elements of financial planning?
I. the firm’s needed investment in new fixed assets
II. the degree of financial leverage a firm chooses to employ
III. the amount of cash the firm thinks is necessary and appropriate to pay shareholders
IV. the amount of liquidity and working capital the firm needs on an ongoing basis
[A] I, III, and IV only
[B] I, II, and III only
[C] II, III, and IV only
[D] I, II, and IV only
[E] I, II, III, and IV
15) Which of the following are basic policy elements of financial planning?
I. capital budgeting decisions
II. dividend policy
III. net working capital decisions
IV. capital structure policy
[A] I and IV only
[B] II and III only
[C] I and II only
[D] I, II, and III only
[E] I, II, III, and IV
16) A firm has sales of $450 and costs of $400. Costs are a constant percentage of sales.
The tax rate is 34 percent. What will the net income be if sales increase by 10 percent?
[A] $3.30
[B] $33.00
[C] $36.30
[D] $146.00
[E] $197.22
17) Financial planning is important because the only way a firm can prosper is for it to grow
substantially.
[A] True
[B] False
18) Moore Money, Inc. has a profit margin of 11 percent and a retention ratio of 70 percent.
Last year the firm had sales of $500 and total assets of $1,000. The desired debt to asset
ratio is 75 percent. What is the firm’s sustainable growth rate?
[A] 2.5 percent
[B] 4.0 percent
[C] 7.1 percent
[D] 11.3 percent
[E] 18.2 percent
19) All else equal, a firm’s capital intensity ratio will increase if:
[A] accounts payable decrease.
[B] net income increases.
[C] sales decrease.
[D] assets decrease.
[E] cost of goods sold increase.
20) When a firm chooses to buy new fixed assets it is making a:
[A] capital budgeting decision.
[B] capital structure decision.
[C] financing decision.
[D] working capital decision.
[E] dividend policy decision.
21) Which one of the following is most directly related to the computation of the sustainable
growth rate?
[A] current ratio
[B] profit margin
[C] inventory turnover
[D] cash ratio
[E] cash coverage ratio
22) A firm is currently operating at full capacity. Sales are forecasted to increase by 20
percent next year. If management is committed to the sales forecast then they should
consider doing which of the following?
I. reviewing the investment policy to ensure it is in line with the projected needs
II. reviewing the financing policy to ensure ample funds are available
III. subcontracting work to other manufacturers
IV. leasing additional equipment
[A] I and II only
[B] I and IV only
[C] III and IV only
[D] I, II, and IV only
[E] I, II, III, and IV
23) Assume a firm is currently operating at less than full capacity. Which one of the
following would be LEAST likely to vary directly with sales?
[A] notes payable
[B] accounts receivable
[C] accounts payable
[D] inventory
[E] cash
24) The percentage of sales approach to financial planning requires:
[A] all assets and liabilities to change at the same rate as sales.
[B] the dividend policy to remain unchanged from year to year.
[C] the firm to be operating at full capacity.
[D] separating accounts into those that vary with sales and those that do not.
[E] a firm to have projected sales increases each year.
25) By developing a financial plan a firm benefits by being forced to:
I. think about and forecast the future.
II. focus solely on best case scenarios.
III. set goals and establish priorities.
[A] I only
[B] I and II only
[C] I and III only
[D] II and III only
[E] I, II and III
26) A financial plan can be a means of reconciling the planned activities of different groups
within a firm.
[A] True
[B] False
27) Which one the following firms would most likely be interested in knowing their
sustainable growth rate?
[A] a firm that believes its equity multiplier is at its optimal level
[B] a firm that has no capacity to raise new debt
[C] a firm in a mature industry that expects limited sales growth in the future
[D] a firm that pays no dividends
[E] a firm that has a low level of investment in fixed assets
28) A firm has net income of $200, total assets of $1,200, and total liabilities of $400. The
total asset turnover ratio is 3. What is the sustainable growth rate assuming dividends paid
total $60?
[A] 8.1 percent
[B] 13.8 percent
[C] 11.5 percent
[D] 16.2 percent
[E] 21.2 percent
29) Based on your current financial plan, it is unlikely that your production level will be able
to meet your sales demands over the planning horizon. This suggests a need to make
changes in your:
[A] capital structure policy.
[B] dividend policy.
[C] net working capital decisions.
[D] capital budgeting policy.
[E] wage policy decisions.
30) Aggregation refers to the process by which a firm first projects its aggregate investment
requirement, then breaks that total up and allocates it to the individual investment proposals
of each operational unit within the firm.
[A] True
[B] False
31) Conventional wisdom holds that financial plans don’t work, but financial planning does.
[A] True
[B] False
32) Simply Red, Inc. has a return on equity of 14 percent, a dividend payout ratio of 20
percent, an equity multiplier of 1.4, and a profit margin of 1.2 percent. What is the
sustainable growth rate?
[A] 2.0 percent
[B] 2.9 percent
[C] 5.3 percent
[D] 8.7 percent
[E] 12.6 percent
33) A firm earns net income of $25,000 in a given year while the retained earnings increase
$15,000 for that same year. The retention ratio is:
[A] 25 percent.
[B] 40 percent.
[C] 60 percent.
[D] 75 percent.
[E] 100 percent.
34) A firm has current assets of $100, net fixed assets of $200, accounts payable of $50,
long-term debt of $100, equity of $150, sales of $1,000, costs of $800, and a tax rate of 34
percent. Assume costs and assets increase at the same rate as sales. Also assume 40
percent of net income is paid out in dividends. What is the maximum growth rate
achievable assuming no external debt or equity is available?
[A] 21.4 percent
