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Exam 4: Long-Term Financial Planning and Growthpart Three: Valuation of Future Cash Flows

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Question 1

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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
E) $1,515.25

F) A) and B)
G) A) and C)

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Question 2

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If a firm equates its pro forma sales growth to the rate of sustainable growth,and has positive net income and excess capacity,then the:

A) maximum capacity level will have to increase at the same rate as sales growth.
B) total assets will have to increase at the same rate as sales growth.
C) debt-equity ratio will increase.
D) retained earnings will increase.
E) number of common shares outstanding will increase.

F) C) and D)
G) A) and E)

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Question 3

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The most recent financial statements for Heng Co.are shown here: Assets and costs are proportional to sales.The company maintains a constant 45 percent dividend payout ratio and a constant debt-equity ratio.What is the maximum increase in sales that can be sustained next year assuming no new equity is issued?

Identify the four primary determinants of a firm's growth and explain how each factor could either add to or limit the growth potential of a firm.

-The most recent financial statements for Benatar Co.are shown here: Assets and costs are proportional to sales.Debt and equity are not.The company maintains a constant 40 percent dividend payout ratio.No external equity financing is possible.What is the internal growth rate?

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?

Designer's Outlet has a capital intensity ratio of 0.92 at full capacity.Currently,total assets are $48,900 and current sales are $51,200.At what level of capacity is the firm currently operating?

Which one of the following correctly defines the retention ratio?

Fixed Appliance Co.wishes to maintain a growth rate of 8 percent a year,a constant debt-equity ratio of 0.42,and a dividend payout ratio of 50 percent.The ratio of total assets to sales is constant at 1.3.What profit margin must the firm achieve?

A firm is currently operating at full capacity.Net working capital,costs,and all assets vary directly with sales.The firm does not wish to obtain any additional equity financing.The dividend payout ratio is constant at 40 percent.If the firm has a positive external financing need,that need will be met by:

You are getting ready to prepare pro forma statements for your business.Which one of the following are you most apt to estimate first as you begin this process?

Sales can often increase without increasing which one of the following?

Which of the following are needed to determine the amount of fixed assets required to support each dollar of sales? I.current amount of fixed assets II.current sales III.current level of operating capacity IV.projected growth rate of sales

Financial plans generally tend to ignore which one of the following?

Consider the income statement for Heir Jordan Corporation: A 22 percent growth rate in sales is projected.What is the pro forma addition to retained earnings assuming all costs vary proportionately with sales?

-Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth?

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?

The most recent financial statements for Moose Tours,Inc.follow.Sales for 2009 are projected to grow by 16 percent.Interest expense will remain constant;the tax rate and dividend payout rate will also remain constant.Costs,other expenses,current assets,and accounts payable increase spontaneously will sales.If the firm is operating at full capacity and no new debt or equity is issued,how much external financing is needed to support the 16 percent growth rate in sales?

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?

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?