Financial Planning

FINANCIAL PLANNING
Test I. True or False

1. Financial planning should attempt to minimize risk. FALSE
2. The primary aim of financial planning is to obtain better forecasts of future cash flows
and earnings. FALSE
3. Financial planning is necessary because financing &investment decisions interact
and should not be made independently. TRUE
4. Firm's planning horizons rarely exceed 3 years. FALSE
5. Individual capital investment projects are not considered in a financial plan unless
they are very large TRUE
6. Financial planning requires accurate & consistent forecasting. TRUE
7. Financial planning models should include as much detail as possible. FALSE
8. The sustainable growth rate is defined as the maximum rate at which company sales
can increase. FALSE
9. The sustainable growth rate is the only growth rate in sales that is consistent with
stable values of the profit margin, retention rate, asset turnover, and leverage
(assets/equity) TRUE
10. A company experiencing balanced growth does not generate cash surpluses or
cash deficits. TRUE
11. If a company seeks to maximize firm value, it should never grow at a rate above its
sustainable growth rate. FALSE
12. The only way a company can grow at a rate above its current sustainable growth
rate is by increasing leverage FALSE
13. Share repurchases usually decrease earnings per share FALSE
14. One way to manage an actual growth rate above the sustainable growth rate is to
decrease prices. FALSE
15. One way to manage an actual growth rate below the sustainable growth rate is to
repurchase shares TRUE
Test II
16. Which one of the following will increase the sustainable rate of growth a corporation
can achieve?
A. avoidance of external equity financing
B. increase in corporate tax rates
C. reduction in the retention ratio
D. decrease in the dividend payout ratio
E. decrease in sales given a positive profit margin
F. None of the options are correct.
17. Which of these ratios are the determinants of a firm’s sustainable growth rate?
I. Assets-to-equity ratio
II. Profit margin
III. Retention ratio
IV. Asset turnover ratio
A. I and III only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
F. None of the options are correct
18. The retention ratio is

A. equal to net income divided by the change in total equity.
B. the percentage of net income available to the firm to fund future growth.
C. equal to one minus the asset turnover ratio.
D. the change in retained earnings divided by the dividends paid.
E. the dollar increases in net income divided by the dollar increase in sales.
19. Which of the following statements is true?

A. Rapid growth spurs increases in market share and profits and thus, is always a
blessing.
B. Firms that grow rapidly very rarely encounter financial problems.
C. The cash flows generated in a given time period are equal to the profits reported.
D. Profits provide assurance that cash flow will be sufficient to maintain solvency.
E. Due to required cash investments in current assets, fast-growing and
profitable companies can literally "grow broke".
20. Which one of the following correctly defines the retention ratio?

A. one plus the dividend payout ratio
B. additions to retained earnings divided by net income
C. additions to retained earnings divided by dividends paid
D. net income minus additions to retained earnings
E. net income minus cash dividends
21. 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
E. capacity utilization policy
22. Which of the following questions are appropriate to address upon conducting

sustainable growth analysis and the financial planning process?
I. Should the firm merge with a competitor?
II. Should additional equity be sold?
III. Should a particular division be sold?
IV. Should a new product be introduced?
A. I, II, and III only
B. I, II, and IV only
C. I, III, and IV only
D. II, III, and IV only
23. The sustainable growth rate of a firm is best described as the

A. minimum growth rate achievable, assuming a 100 percent retention ratio.
B. minimum growth rate achievable if the firm maintains a constant equity multiplier.
C. maximum growth rate achievable, excluding external financing of any kind.
D. maximum growth rate achievable, excluding any external equity financing
while maintaining a constant debt-equity ratio.
E. maximum growth rate achievable with unlimited debt financing.
24. The sustainable growth rate

A. assumes there is no external financing of any kind.
B. assumes no additional long-term debt is available.
C. assumes the debt-equity ratio is constant.
D. assumes the debt-equity ratio is 1.0.
E. assumes all income is retained by the firm.
25. Which of the following can affect a firm's sustainable rate of growth?

I. Asset turnover ratio
II. Profit margin
III. Dividend policy
IV. Financial leverage
A. III only
B. I and III only
C. II, III, and IV only
D. I, II, and IV only
26. Gujarat Corporation doubled its shareholders’ equity during the year 2017. Gujarat
did not issue any new equity, repurchase any equity, or pay out any dividends during
the year. What is Gujarat’s sustainable growth rate for 2017?
A. 50% B. 100% C. 150% D. 200%
27. Hayesville Corporation had net income of $5 million this year on net sales of $125
million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held
$75 million in total liabilities. It paid out $2 million in dividends for the year. What is
Hayesville Corporation’s sustainable growth rate?
A. 3% B. 4% C. 5% D. 6%
28. Which one of the following will increase the sustainable rate of growth a corporation
can achieve?
A. avoidance of external equity financing
B. increase in corporate tax rates
C. reduction in the retention ratio
D. decrease in the dividend payout ratio
E. decrease in sales given a positive profit margin
29. Which of the following would increase a company’s need for external finance, all
else equal?
A. An increase in the dividend payout ratio
B. A decrease in sales growth
C. An increase in profit margin
D. A decrease in the collection period
30. You constructed a pro forma balance sheet for next year and found that external
financing required was negative (i.e., the company projected a financing surplus). Which
of the following options, all else equal, would NOT correct theprojected imbalance?
A. A stock repurchase
B. A decrease in accounts payable
C. An increase in cash and marketable securities
D. An increase in the retention ratio
31. The sustainable growth rate

A. is the highest growth rate attainable for a firm that pays no dividends.
B. is the highest growth rate attainable for a firm without issuing new stock.
C. can never be greater than the return on equity.
D. can be increased by decreasing leverage
32. Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent,
and the firm has a 30 percent dividend payout ratio. What is the projected increase in
retained earnings?
$14,700
33. Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio.
The asset turnover ratio is 1.6, and the assets-to-equity ratio (using beginning-of-period
equity) is 1.77. What is Komatsu’s sustainable rate of growth?
10.83%
34. A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2
percent. Its asset turnover ratio is 0.85, and its assets-to-equity ratio (using beginning-
of-period equity) is 1.80. What is its profit margin?
10.13%
35. Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of
the year, the company had total assets of $195,000. During the year, the company sold
no new equity. Net income for the year was $72,000, and dividends were $44,640.
What is Westcomb’s sustainable growth rate?
18.24 percent%
Executive Suites, Inc., currently has an equity-to-asset ratio of 0.8 Its ROE is 18% The
firm currently reinvests one-third of its earnings back into the firm. Moreover, if it plans
to keep leverage unchanged, it will issue an additional 20 cents of debt for every 80
cents of reinvested earnings. Given this policy, its maximum growth rate is 6%
Sustainable growth rate = plow back ratio x ROE
= 1/3 x .18 = .06 of 6%
Suppose Executive Suites reduces the dividend payout ratio to 25% Calculate its
growth rate assuming
That no new debt or equity will be issued 10.8%
That the firm maintains its debt-to-equity ratio at .25 13.5%

Financial Planning

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FINANCIAL PLANNING

Test I. True or False

18. The retention ratio is

19. Which of the following statements is true?

20. Which one of the following correctly defines the retention ratio?

22. Which of the following questions are appropriate to address upon conducting

23. The sustainable growth rate of a firm is best described as the

24. The sustainable growth rate

25. Which of the following can affect a firm's sustainable rate of growth?

31. The sustainable growth rate

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