Chapter 18 Test bank – Static Key
1.
A planning horizon refers to the amount of time necessary to develop the financial plan.
2.
A common, long-term corporate financial planning horizon would stretch for at least 15 to 20 years.
3.
Financial plans will rarely succeed unless the forecasts are perfect.
4.
Financial planning focuses on the big picture.
5.
Financial planning may incorporate scenario analysis as part of the planning process.
6.
The primary aim of financial planning is to obtain better forecasts of future cash flows and earnings.
7.
Financial planning is concerned with possible surprises as well as the most likely outcomes.
8.
Financial planning should attempt to minimize risk.
9.
Financial planning is necessary because financing and investment decisions interact and should not be made independently.
10.
A typical horizon for long-term planning is 5 years.
11.
Individual capital investment projects are not considered in a financial plan unless they are very large.
12.
Financial planning requires careful and consistent forecasting.
13.
Financial planning models must include as much detail as possible.
14.
The sustainable growth rate is the rate at which the firm can grow without changing its leverage ratio.
15.
Financial planning just means formulating the company’s response to the most likely events.
16.
Adaptability is not a desirable feature in financial plans.
17.
Pro formas are projected or forecasted financial statements.
18.
Percentage of sales models are planning models in which the sales forecasts are the driving variables and most other
variables are proportional to sales.
19.
The balancing items in a financial planning model are variables that adjust to maintain the consistency of the model. They
are also known as plugs.
20.
Debt can be used as a plug item in financial planning.
21.
Financial models identify the best financing plan.
22.
The decision to acquire fixed assets is unrelated to the current level of excess capacity.
23.
Financial planning models routinely adjust for present value and risk.
24.
If factories are operating below full capacity, sales can increase without investment in fixed assets. However, beyond some
sales level, new capacity must be added and additional investment in fixed assets must be made.
25.
A financial planning model will generally include all of the following except the:
26.
Planners often recommend entering a market for “strategic” reasons because the:
27.
Which one of the following is not typically included among the three major components of a financial planning model?
28.
Which one of the following is not a reason for compiling financial plans?
29.
Calculate the rate at which a firm can grow without changing its leverage if its payout ratio is 70%, equity outstanding at the
beginning of the year is $940,000, and its net income for the year is $162,000.
30.
The firm’s current financial statements would be included in:
31.
The implications of the forecasts from a financial plan are determined by the:
32.
Pro formas refer to:
33.
Outputs from a financial plan would include such items as:
34.
When most of the elements of a financial plan are related to sales levels, the plan is:
35.
A planner’s percentage of sales model forecasts that sales will grow by 20% next year. If costs of goods sold are
proportionate at 70% of sales, then costs of goods sold will:
36.
When a firm has no spare capacity, it:
37.
If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of 0.75
then:
38.
If sales growth for XYZ Corporation exceeds 6%, XYZ will need to seek external financing. This means that 6% is the:
39.
If a firm’s dividend payout ratio is determined after achieving a specific capital structure, then:
40.
A firm has $4 million in total assets and $2.2 million in equity. How much of its $500,000 capital budget should be debt–
financed to retain the same debt-equity ratio?
41.
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?
42.
A potential downside to using dividends as the plug item is that:
43.
A firm that wants to increase its sustainable growth rate can do so by __________ the __________ ratio or by __________
the __________, or both.
44.
Alternative “what if?” scenarios can be easily accommodated in financial planning by use of:
45.
A firm currently has sales of $382,000 and net working capital of $45,840. Assume net working capital changes in direct
proportion to sales. What will be the increase in net working capital if sales increase by 8%?
46.
The observation that additions to fixed assets are lumpier than additions to current assets indicates that:
47.
A firm can achieve a higher growth rate without raising external capital if it:
48.
Other things equal, a firm can grow more rapidly without raising new capital if:
49.
If a firm with an asset base of $3 million recently added $150,000 to retained earnings after a dividend payment of $100,000,
then its internal growth rate is:
50.
What is the maximum internal growth rate for a firm reporting net income of $500,000, a dividend payout ratio of 40%, and
total assets of $10 million?
51.
A firm plans to grow at 6% a year without increasing financial leverage. It expects to earn a 10% return on equity. What
proportion of earnings should it plan to pay out?
52.
A firm has an ROE of 15% and a debt-equity ratio of 40%. If it wishes to grow by 9% a year without external financing,
what is the maximum proportion of earnings that it can pay out?
53.
Which one of the following will reduce the internal growth rate, other things equal?
54.
What is the sustainable growth rate for a firm with net income of $2.5 million, cash dividends of $1.5 million, and return on
equity of 18%?
55.
The sustainable rate of growth assumes that the:
56.
A firm has a policy of not issuing debt and paying out 40% of its earnings. Its asset turnover is 2.0 and its profit margin is
10%. What is its sustainable growth rate?
57.
A firm has sales of $1.2 million, a profit margin of 5%, and a dividend payout ratio of 25%. How much will be added to
retained earnings next year if sales increase by 6%?
58.
Short-term financial rarely look beyond: