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105. How can a firm quickly determine if its desired rate of growth is feasible?
106. How are financial planning models constructed?
107. What are the contents and uses of a financial plan?
108. Managers sometimes state a target growth rate for sales or earnings per share. Do you
think that either makes sense as a corporate goal? If not, why do you think that managers focus
on them?
109. Little Toys has $50 million invested in fixed assets and generates sales of $60 million.
Currently, the company is working at only 80% of capacity. How much can sales expand without
any further investment in fixed assets? How much investment in fixed assets would be required
to support a 30% expansion in sales?
110. A firm has set its target capital structure at 40% debt. Further, it intends to continue with
a 30% dividend payout. Finally, it hopes to maintain a constant growth rate of 7%. If the profit
margin and asset turnover are currently 8% and .9, respectively, do the constraints sound
realistic? If not, what might you suggest?
111. Why is it important that financial plans incorporate adaptability?
112. List and briefly describe the components of a financial planning model.
113. A firm with a 30% total debt ratio, total assets of $10 million, and an ROE of 14% has
been paying out 60% of earnings to shareholders in the form of dividends. Sales are expected to
increase by 10% this year, a faster growth rate than usual. Will external funding be required
under these conditions? Will the debt-equity ratio remain constant?
114. Discuss the percentage of sales model and its potential pitfalls in the financial planning
process.
115. Discuss the concept of balancing items in financial planning models.
116. Why is it uncommon to expect assets to change proportionately with sales?
117. Consider a firm with $3 million in total assets, $400,000 in net income, and $150,000 in
dividend payments. Calculate the maximum rate of growth in sales that can be obtained without
tapping external sources of funds. Next, compute the growth rate if the dividend payout ratio is
reduced to 20%. Do your answers suggest that shareholders must be willing to trade dividends
for growth?
118. What is the difference between the internal and sustainable growth rates, both in
definition and in calculation? Under what condition will the rates be equal?
119. Calculate the sustainable growth rate for a firm with a profit margin of 8%, an asset
turnover of 1.25, a total debt ratio of 45%, and a plowback ratio of 65%. Assuming that the ROE
remains constant, how large can the sustainable growth rate become?
