Chap 004

Chapter 04 - Long-Term Financial Planning and Growth
Chapter 04 Long-Term Financial Planning and Growth Answer Key

Multiple Choice Questions

1. Phil is woring on a !inancial plan !or the ne"t three years. This time period is re!erred to as
which one o! the !ollowing#
A. !inancial range
B. planning hori$on
C. planning agenda
%. short-r&n
'. c&rrent !inancing period
(e!er to section 4.1

AACSB: N/A
Difficulty: Basic
Learning Objective: 4-1
Section: 41
!o"ic: #lanning $ori%on

). Atlas *nd&stries com+ines the smaller in,estment proposals !rom each operational &nit into
a single pro-ect !or planning p&rposes. This process is re!erred to as which one o! the
!ollowing#
A. con-oining
B. aggregation
C. conglomeration
%. appropriation
'. s&mmation

AACSB: N/A
Difficulty: Basic
Section: 41
!o"ic: Aggregation

4-1
.. /hich one o! the !ollowing terms is applied to the !inancial planning method which &ses
the pro-ected sales le,el as the +asis !or determining changes in +alance sheet and income
statement acco&nt ,al&es#
A. percentage o! sales method
0. sales dil&tion method
C. sales reconciliation method
%. common-si$e method
'. trend method
(e!er to section 4..

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: #ercentage of sales a""roac$

4. /hich one o! the !ollowing terms is de!ined as di,idends paid e"pressed as a percentage o!
net income#
A. di,idend retention ratio
0. di,idend yield
C. di,idend payo&t ratio
%. di,idend portion
'. di,idend section

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: Divi'en' "ayout ratio

4-)
1. /hich one o! the !ollowing correctly de!ines the retention ratio#
A. one pl&s the di,idend payo&t ratio
B. addition to retained earnings di,ided +y net income
C. addition to retained earnings di,ided +y di,idends paid
%. net income min&s additions to retained earnings
'. net income min&s cash di,idends

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: (etention ratio

2. /hich one o! the !ollowing ratios identi!ies the amo&nt o! assets a !irm needs in order to
generate 31 in sales#
A. c&rrent ratio
0. e4&ity m&ltiplier
C. retention ratio
D. capital intensity ratio
'. payo&t ratio

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: Ca"ital intensity ratio

4-.
5. The internal growth rate o! a !irm is +est descri+ed as the6
A. minim&m growth rate achie,a+le ass&ming a 100 percent retention ratio.
0. minim&m growth rate achie,a+le i! the !irm maintains a constant e4&ity m&ltiplier.
C. ma"im&m growth rate achie,a+le e"cl&ding e"ternal !inancing o! any ind.
%. ma"im&m growth rate achie,a+le e"cl&ding any e"ternal e4&ity !inancing while
maintaining a constant de+t-e4&ity ratio.
'. ma"im&m growth rate achie,a+le with &nlimited de+t !inancing.

AACSB: N/A
Difficulty: Basic
Learning Objective: 4-&
Section: 44
!o"ic: )nternal gro*t$ rate

7. The s&staina+le growth rate o! a !irm is +est descri+ed as the6
A. minim&m growth rate achie,a+le ass&ming a 100 percent retention ratio.
0. minim&m growth rate achie,a+le i! the !irm maintains a constant e4&ity m&ltiplier.
C. ma"im&m growth rate achie,a+le e"cl&ding e"ternal !inancing o! any ind.
D. ma"im&m growth rate achie,a+le e"cl&ding any e"ternal e4&ity !inancing while
maintaining a constant de+t-e4&ity ratio.
'. ma"im&m growth rate achie,a+le with &nlimited de+t !inancing.

AACSB: N/A
Difficulty: Basic
Section: 44
!o"ic: Sustainable gro*t$ rate

4-4
8. 9o& are de,eloping a !inancial plan !or a corporation. /hich o! the !ollowing 4&estions
will +e considered as yo& de,elop this plan#
*. :ow m&ch net woring capital will +e needed#
**. /ill additional !i"ed assets +e re4&ired#
***. /ill di,idends +e paid to shareholders#
*;. :ow m&ch new de+t m&st +e o+tained#
A. * and *; only
0. ** and *** only
C. *< ***< and *; only
%. **< ***< and *; only
E. *< **< ***< and *;
(e!er to the introd&ction to chapter 4

AACSB: N/A
Difficulty: Basic
Section: )ntro'uction to c$a"ter 4
!o"ic: +inancial "lanning

10. Financial planning6
A. !oc&ses solely on the short-term o&tloo !or a !irm.
0. is a process that !irms employ only when ma-or changes to a !irm=s operations are
anticipated.
C. is a process that !irms &ndergo once e,ery !i,e years.
D. considers m&ltiple options and scenarios !or the ne"t two to !i,e years.
'. pro,ides minimal +ene!its !or !irms that are highly responsi,e to economic changes.

AACSB: N/A
Difficulty: Basic
Section: 41

4-1
11. Financial planning accomplishes which o! the !ollowing !or a !irm#
*. determination o! asset re4&irements
**. de,elopment o! plans to contend with &ne"pected e,ents
***. esta+lishment o! priorities
*;. analysis o! !&nding options
A. * and *** only
0. ** and *; only
C. *< ***< and *; only
%. *< **< and *** only
E. *< **< ***< and *;

AACSB: N/A
Difficulty: Basic
Section: 41

1). /hich o! the !ollowing 4&estions are appropriate to address d&ring the !inancial planning
process#
*. >ho&ld the !irm merge with a competitor#
**. >ho&ld additional shares o! stoc +e sold#
***. >ho&ld a partic&lar di,ision +e sold#
*;. >ho&ld a new prod&ct +e introd&ced#
A. *< **< and *** only
0. *< **< and *; only
C. *< ***< and *; only
%. **< ***< and *; only
E. *< **< ***< and *;

AACSB: N/A
Difficulty: Basic
Section: 41

4-2
1.. /hich one o! the !ollowing statements concerning !inancial planning !or a !irm is
correct#
A. Financial planning !or !i"ed assets is done on a segregated +asis within each di,ision.
B. Financial plans o!ten contain alternati,e options +ased on economic de,elopments.
C. Financial plans !re4&ently contain con!licting goals.
%. Financial plans ass&me that !irms o+tain no additional e"ternal !inancing.
'. The !inancial planning process is +ased on a single set o! economic ass&mptions.

AACSB: N/A
Difficulty: Basic
Section: 41

14. 9o& are getting ready to prepare pro !orma statements !or yo&r +&siness. /hich one o! the
!ollowing are yo& most apt to estimate !irst as yo& +egin this process#
A. !i"ed assets
0. c&rrent e"penses
C. sales !orecast
%. pro-ected net income
'. e"ternal !inancing need

AACSB: N/A
Difficulty: Basic
Section: 41
!o"ic: #ro for,a state,ent

4-5
11. /hich one o! the !ollowing statements is correct#
A. Pro !orma statements m&st ass&me that no new e4&ity is iss&ed.
B. Pro !orma statements are pro-ections< not g&arantees.
C. Pro !orma statements are limited to a +alance sheet and income statement.
%. Pro !orma !inancial statements m&st ass&me that no di,idends will +e paid.
'. ?et woring capital needs are e"cl&ded !rom pro !orma comp&tations.
(e!er to section 4.)

AACSB: N/A
Difficulty: Basic
Section: 4-
!o"ic: #ro for,a state,ents

12. /hen &tili$ing the percentage o! sales approach< managers6
*. estimate company sales +ased on a desired le,el o! net income and the c&rrent pro!it
margin.
**. consider only those assets that ,ary directly with sales.
***. consider the c&rrent prod&ction capacity le,el.
*;. can pro-ect +oth net income and net cash !lows.
A. * and ** only
0. ** and *** only
C. *** and *; only
%. *< ***< and *; only
'. **< ***< and *; only

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: #ercentage of sales a""roac$

4-7
15. /hich one o! the !ollowing is correct in relation to pro !orma statements#
A. Fi"ed assets m&st increase i! sales are pro-ected to increase.
0. ?et woring capital is a!!ected only when a !irm=s sales are e"pected to e"ceed the !irm=s
c&rrent prod&ction capacity.
C. The addition to retained earnings is e4&al to net income pl&s di,idends paid.
%. Long-term de+t ,aries directly with sales when a !irm is c&rrently operating at ma"im&m
capacity.
E. *n,entory changes are directly proportional to sales changes.

AACSB: N/A
Difficulty: Basic
Section: 4&

17. /hen constr&cting a pro !orma statement< net woring capital generally6
A. remains !i"ed.
0. ,aries only i! the !irm is c&rrently prod&cing at !&ll capacity.
C. ,aries only i! the !irm maintains a !i"ed de+t-e4&ity ratio.
%. ,aries only i! the !irm is prod&cing at less than !&ll capacity.
E. ,aries proportionally with sales.

AACSB: N/A
Difficulty: Basic
Section: 4&

4-8
18. A pro !orma statement indicates that +oth sales and !i"ed assets are pro-ected to increase
+y 5 percent o,er their c&rrent le,els. Gi,en this< yo& can sa!ely ass&me that the !irm6
A. is pro-ected to grow at the internal rate o! growth.
0. is pro-ected to grow at the s&staina+le rate o! growth.
C. c&rrently has e"cess capacity.
D. is c&rrently operating at !&ll capacity.
'. retains all o! its net income.

AACSB: N/A
Difficulty: Basic
Section: 4&

)0. A !irm is c&rrently operating at !&ll capacity. ?et woring capital< costs< and all assets
,ary directly with sales. The !irm does not wish to o+tain any additional e4&ity !inancing. The
di,idend payo&t ratio is constant at 40 percent. *! the !irm has a positi,e e"ternal !inancing
need< that need will +e met +y6
A. acco&nts paya+le.
B. long-term de+t.
C. !i"ed assets.
%. retained earnings.
'. common stoc.

AACSB: N/A
Difficulty: Basic
Learning Objective: 4--
Section: 4&
!o"ic: ./ternal financing nee'

4-10
)1. /hich one o! the !ollowing policies most directly a!!ects the pro-ection o! the retained
earnings +alance to +e &sed on a pro !orma statement#
A. net woring capital policy
0. capital str&ct&re policy
C. di,idend policy
%. capital +&dgeting policy
'. capacity &tili$ation policy

AACSB: N/A
Difficulty: Basic
Section: 4&

)). 9o& are comparing the c&rrent income statement o! a !irm to the pro !orma income
statement !or ne"t year. The pro !orma is +ased on a !o&r percent increase in sales. The !irm is
c&rrently operating at 71 percent o! capacity. ?et woring capital and all costs ,ary directly
with sales. The ta" rate and the di,idend payo&t ratio are !i"ed. Gi,en this in!ormation< which
one o! the !ollowing statements m&st +e tr&e#
A. The pro-ected net income is e4&al to the c&rrent year=s net income.
0. The ta" rate will increase at the same rate as sales.
C. (etained earnings will increase +y !o&r percent o,er its c&rrent le,el.
D. Total assets will increase +y less than !o&r percent.
'. Total lia+ilities and owners= e4&ity will increase +y !o&r percent.

AACSB: N/A
Difficulty: )nter,e'iate
Section: 4&

4-11
).. A !irm is operating at 80 percent o! capacity. This in!ormation is primarily needed to
pro-ect which one o! the !ollowing acco&nt ,al&es when compiling pro !orma statements#
A. sales
0. costs o! goods sold
C. acco&nts recei,a+le
D. !i"ed assets
'. long-term de+t

AACSB: N/A
Difficulty: Basic
Section: 4&

)4. /hich one o! the !ollowing capital intensity ratios indicates the largest need !or !i"ed
assets per dollar o! sales#
A. 0.50
0. 0.72
C. 1.00
%. 1.02
E. 1.11

AACSB: N/A
Difficulty: Basic
Section: 4&

4-1)
)1. /hich o! the !ollowing are needed to determine the amo&nt o! !i"ed assets re4&ired to
s&pport each dollar o! sales#
*. c&rrent amo&nt o! !i"ed assets
**. c&rrent sales
***. c&rrent le,el o! operating capacity
*;. pro-ected growth rate o! sales
A. * and *** only
0. ** and *; only
C. *< **< and *** only
%. **< ***< and *; only
'. *< **< ***< and *;

AACSB: N/A
Section: 4&

)2. The plow+ac ratio is6
A. e4&al to net income di,ided +y the change in total e4&ity.
B. the percentage o! net income a,aila+le to the !irm to !&nd !&t&re growth.
C. e4&al to one min&s the retention ratio.
%. the change in retained earnings di,ided +y the di,idends paid.
'. the dollar increase in net income di,ided +y the dollar increase in sales.

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: #lo*bac0 ratio

4-1.
)5. A !irm=s net woring capital and all o! its e"penses ,ary directly with sales. The !irm is
operating c&rrently at 82 percent o! capacity. The !irm wants no additional e"ternal !inancing
o! any ind. /hich one o! the !ollowing statements related to the !irm=s pro !orma statements
!or ne"t year m&st +e correct#
A. Total lia+ilities will remain constant at this year=s ,al&e.
0. The ma"im&m rate o! sales increase is 4 percent.
C. The !irm cannot e"ceed its internal rate o! growth.
%. The pro-ected owners= e4&ity will e4&al this year=s ending e4&ity +alance.
'. Fi"ed assets m&st remain constant at the c&rrent le,el.

AACSB: N/A
Section: 44
!o"ic: )nternal rate of gro*t$

)7. /hich one o! the !ollowing will increase the ma"im&m rate o! growth a corporation can
achie,e#
A. a,oidance o! e"ternal e4&ity !inancing
0. increase in corporate ta" rates
C. red&ction in the retention ratio
D. decrease in the di,idend payo&t ratio
'. decrease in sales gi,en a positi,e pro!it margin

AACSB: N/A
Section: 44
!o"ic: 1ro*t$ rates

4-14
)8. @artin Aerospace is c&rrently operating at !&ll capacity +ased on its c&rrent le,el o! assets.
>ales are e"pected to increase +y 4.1 percent ne"t year< which is the !irm=s internal rate o!
growth. ?et woring capital and operating costs are e"pected to increase directly with sales.
The interest e"pense will remain constant at its c&rrent le,el. The ta" rate and the di,idend
payo&t ratio will +e held constant. C&rrent and pro-ected net income is positi,e. /hich one o!
the !ollowing statements is correct regarding the pro !orma statement !or ne"t year#
A. The pro !orma pro!it margin is e4&al to the c&rrent pro!it margin.
0. (etained earnings will increase at the same rate as sales.
C. Total assets will increase at the same rate as sales.
%. Long-term de+t will increase in direct relation to sales.
'. Awners= e4&ity will remain constant.

AACSB: N/A
Section: 4&

.0. A !irm=s e"ternal !inancing need is !inanced +y which o! the !ollowing#
A. retained earnings
0. net woring capital and retained earnings
C. net income and retained earnings
D. de+t or e4&ity
'. owners= e4&ity< incl&ding retained earnings

AACSB: N/A
Difficulty: Basic
Section: 4&

4-11
.1. >ales can o!ten increase witho&t increasing which one o! the !ollowing#
A. acco&nts recei,a+le
0. cost o! goods sold
C. acco&nts paya+le
D. !i"ed assets
'. in,entory

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: Ca"acity level

.). 0lasco *nd&stries is c&rrently at !&ll-capacity sales. /hich one o! the !ollowing is limiting
sales to this le,el#
A. net woring capital
0. long-term de+t
C. in,entory
D. !i"ed assets
'. de+t-e4&ity ratio

AACSB: N/A
Difficulty: Basic
Section: 4&
!o"ic: +ull ca"acity sales

4-12
... All else constant< which one o! the !ollowing will increase the internal rate o! growth#
A. decrease in the retention ratio
0. decrease in net income
C. increase in the di,idend payo&t ratio
D. decrease in total assets
'. increase in costs o! goods sold

AACSB: N/A
Section: 44
!o"ic: )nternal rate of gro*t$

.4. The e"ternal !inancing need6
A. will limit growth i! &n!&nded.
0. is &na!!ected +y the di,idend payo&t ratio.
C. m&st +e !&nded +y long-term de+t.
%. ignores any changes in retained earnings.
'. considers only the re4&ired increase in !i"ed assets.

AACSB: N/A
Difficulty: Basic
Section: 4&

4-15
.1. /hich one o! the !ollowing will ca&se the s&staina+le growth rate to e4&al to internal
growth rate#
A. di,idend payo&t ratio greater than 1.0
0. de+t-e4&ity ratio o! 1.0
C. retention ratio +etween 0.0 and 1.0
D. e4&ity m&ltiplier o! 1.0
'. $ero di,idend payments

AACSB: N/A
Section: 44
!o"ic: 1ro*t$ rates

.2. The s&staina+le growth rate6
A. ass&mes there is no e"ternal !inancing o! any ind.
0. ass&mes no additional long-term de+t is a,aila+le.
C. ass&mes the de+t-e4&ity ratio is constant.
%. ass&mes the de+t-e4&ity ratio is 1.0.
'. ass&mes all income is retained +y the !irm.

AACSB: N/A
Difficulty: Basic
Section: 44

4-17
.5. *! a !irm e4&ates its pro !orma sales growth to the rate o! s&staina+le growth< and has
positi,e net income and e"cess capacity< then the6
A. ma"im&m capacity le,el will ha,e to increase at the same rate as sales growth.
0. total assets will ha,e to increase at the same rate as sales growth.
C. de+t-e4&ity ratio will increase.
D. retained earnings will increase.
'. n&m+er o! common shares o&tstanding will increase.

AACSB: N/A
Section: 44
!o"ic: Sustainable gro*t$

.7. >al=s Pi$$a has a di,idend payo&t ratio o! 10 percent. The !irm does not want to iss&e
additional e4&ity shares +&t does want to maintain its c&rrent de+t-e4&ity ratio and its c&rrent
di,idend policy. The !irm is pro!ita+le. /hich one o! the !ollowing de!ines the ma"im&m rate
at which this !irm can grow#
A. internal growth rate B1 - 0.10C
0. s&staina+le growth rate B1 - 0.10C
C. internal growth rate
D. s&staina+le growth rate
'. $ero percent

AACSB: N/A
Difficulty: Basic
Section: 44

4-18
.8. /hich o! the !ollowing can a!!ect a !irm=s s&staina+le rate o! growth#
*. capital intensity ratio
**. pro!it margin
***. di,idend policy
*;. de+t-e4&ity ratio
A. *** only
0. * and *** only
C. **< ***< and *; only
%. *< **< and *; only
E. *< **< ***< and *;

AACSB: N/A
Section: 44

40. Financial plans generally tend to ignore which one o! the !ollowing#
A. di,idend policy
0. manager=s goals and o+-ecti,es
C. riss associated with cash !lows
%. operating capacity le,els
'. capital str&ct&re policy

AACSB: N/A
Difficulty: Basic
Section: 42
!o"ic: +inancial "lans

4-)0
41. The !inancial planning process tends to place the least emphasis on which one o! the
!ollowing#
A. growth limitations
0. capacity &tili$ation
C. maret ,al&e o! a !irm
%. capital str&ct&re o! a !irm
'. di,idend policy

AACSB: N/A
Difficulty: Basic
Section: 42

4). The !inancial planning process6
*. in,ol,es internal negotiations among di,isions.
**. 4&anti!ies senior manager=s goals.
***. considers only internal !actors.
*;. reconciles company acti,ities across di,isions.
A. *** and *; only
0. ** and *** only
C. *< **< and *; only
%. **< ***< and *; only
'. *< **< ***< and *;

AACSB: N/A
Section: 42
!o"ic: +inancial "lanning "rocess

4-)1
4.. A Procr&stes approach to !inancial planning is +ased on6
A. a policy o! prod&cing a !inancial plan once e,ery !i,e years.
B. de,eloping a plan aro&nd the goals o! senior managers.
C. a proacti,e approach to the economic o&tloo.
%. a !le"i+le capital +&dget.
'. a !le"i+le capital str&ct&re.

AACSB: N/A
Difficulty: Basic
Section: 42
!o"ic: #rocrustes a""roac$

44. Fresno >alads has c&rrent sales o! 34<800 and a pro!it margin o! 2.1 percent. The !irm
estimates that sales will increase +y 1 percent ne"t year and that all costs will ,ary in direct
relationship to sales. /hat is the pro !orma net income#
A. 3.0....
0. 3.)5.17
C. 3..4.4.
%. 3..7.50
'. 3.41.10
?et income D 34<800 .021 B1 E .01C D 3..4.4.

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: #ro for,a inco,e

4-))
41. /agner *nd&strial @otors< which is c&rrently operating at !&ll capacity< has sales o!
3)8<000< c&rrent assets o! 31<200< c&rrent lia+ilities o! 31<)00< net !i"ed assets o! 3)5<100< and
a 1 percent pro!it margin. The !irm has no long-term de+t and does not plan on ac4&iring any.
The !irm does not pay any di,idends. >ales are e"pected to increase +y 4.1 percent ne"t year.
*! all assets< short-term lia+ilities< and costs ,ary directly with sales< how m&ch additional
e4&ity !inancing is re4&ired !or ne"t year#
A. -3)18.51
0. -3)01.18
C. 3825..0
%. 31<088.07
'. 31<111.)1
Pro-ected assets D B31<200 E 3)5<100C 1.041 D 3.0<408.10
Pro-ected lia+ilities D 31<)00 1.041 D 31<)14
C&rrent e4&ity D 31<200 E 3)5<100 - 31<)00 D 3)5<800
Pro-ected increase in retained earnings D 3)8<000 .01 1.041 D 31<111.)1
'4&ity !&nding need D 3.0<408.10 - 31<)14 - 3)5<800 - 31<111.)1 D -3)18.51

AACSB: Analytic
Difficulty: Basic
Section: 4-
!o"ic: .3uity financing

42. The Cooie >hoppe e"pects sales o! 34.5<100 ne"t year. The pro!it margin is 4.7 percent
and the !irm has a .0 percent di,idend payo&t ratio. /hat is the pro-ected increase in retained
earnings#
A. 314<500
0. 315<100
C. 317<.00
%. 3)0<200
'. 3)1<000
Change in retained earnings D 34.5<100 .047 B1 - 0..0C D 314<500

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: (etaine' earnings

4-).
45. Gladsden (e!inishers c&rrently has 3)1<800 in sales and is operating at 41 percent o! the
!irm=s capacity. /hat is the !&ll capacity le,el o! sales#
A. 3.1<511
0. 3.2<)10
C. 347<225
%. 311<...
'. 314<100
F&ll-capacity sales D 3)1<800F0.41 D 347<225

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: +ull ca"acity sales

47. The Corner >tore has 3)18<000 o! sales and 3175<000 o! total assets. The !irm is operating
at 75 percent o! capacity. /hat is the capital intensity ratio at !&ll capacity#
A. 0.2)
0. 0.27
C. 0.54
%. 1..1
'. 1.45
F&ll-capacity sales D 3)18<000F0.75 D 3)11<5)4.14
Capital intensity ratio D 3175<000F3)11<5)4.14 D 0.54

AACSB: Analytic
Difficulty: Basic
Section: 4&

4-)4
48. @iller 0ros. :ardware is operating at !&ll capacity with a sales le,el o! 3278<500 and
!i"ed assets o! 3427<000. The pro!it margin is 5 percent. /hat is the re4&ired addition to !i"ed
assets i! sales are to increase +y 10 percent#
A. 3.<)52
0. 34<270
C. 3)7<400
%. 3.)<520
E. 342<700
(e4&ired addition to !i"ed assets D 3427<000 0.10 D 342<700
Ar< Capital intensity ratio D 3427<000F3278<500 D 0.257112
(e4&ired addition to !i"ed assets D 3278<500 0.10 0.257112 D 342<700

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: +i/e' assets

10. %esigner=s A&tlet has a capital intensity ratio o! 0.75 at !&ll capacity. C&rrently< total assets
are 347<800 and c&rrent sales are 31)<.00. At what le,el o! capacity is the !irm c&rrently
operating#
A. 78 percent
0. 81 percent
C. 8. percent
%. 82 percent
'. 87 percent
Total capacity sales D 347<800F0.75 D 312<)02.80
C&rrent capacity &tili$ation D 31)<.00F312<)02.80 D 8. percent

AACSB: Analytic
Section: 4&
!o"ic: Ca"acity level

4-)1
11. @onia=s %inor is operating at 84 percent o! its !i"ed asset capacity and has c&rrent sales
o! 3211<000. :ow m&ch can the !irm grow +e!ore any new !i"ed assets are needed#
A. 4.88 percent
0. 1.57 percent
C. 2.0) percent
D. 2..7 percent
'. 2.58 percent
F&ll-capacity sales D 3211<000F0.84 D 3210<000
@a"im&m growth witho&t additional assets D B3210<000F3211<000C - 1 D 2..7 percent

AACSB: Analytic
Section: 4&
!o"ic: Ca"acity an' gro*t$

1). >top and Go has a 4.1 percent pro!it margin and a 11 percent di,idend payo&t ratio. The
total asset t&rno,er is 1.2 and the de+t-e4&ity ratio is 0.20. /hat is the s&staina+le rate o!
growth#
A. 8.1. percent
0. 8.14 percent
C. 8.78 percent
%. 10.)2 percent
E. 10.71 percent
(et&rn on e4&ity D 0.041 1.20 B1 E 0.20C D 0.111)
>&staina+le growth D G0.111) B1 - 0.11CHFI1 - G.111) B1 - 0.11CHJ D 10.71 percent

AACSB: Analytic
Difficulty: Basic
Section: 44
!o"ic: Sustainable gro*t$

4-)2
1.. (. ?. C.< *nc. desires a s&staina+le growth rate o! 4.1 percent while maintaining a 40
percent di,idend payo&t ratio and a 2 percent pro!it margin. The company has a capital
intensity ratio o! 1.).. /hat e4&ity m&ltiplier is re4&ired to achie,e the company=s desired
rate o! growth#
A. 1...
0. 1..7
C. 1.4)
D. 1.45
'. 1.1.
0.041 D G(A' B1 - 0.40CHFI1 - G(A' B1 - 0.40CHJK (A' D .05155
0.05155 D 0.02 B1F1.).C '@K '@ D 1.45

AACSB: Analytic
Section: 44
!o"ic: .3uity ,ulti"lier

14. A !irm has a retention ratio o! 41 percent and a s&staina+le growth rate o! 2.) percent. The
capital intensity ratio is 1.) and the de+t-e4&ity ratio is 0.24. /hat is the pro!it margin#
A. 2.)7 percent
0. 5.25 percent
C. 8.45 percent
%. 1)..7 percent
E. 14.2. percent
0.02) D G(A' 0.41HFG1 - B(A' 0.41CHK (A' D .1)85.4
0.1)85.4 D P@ B1F1.)C B1 E .024CK P@ D 14.2. percent

AACSB: Analytic
Section: 44
!o"ic: #rofit ,argin

4-)5
11. Frasier Ca+inets wants to maintain a growth rate o! 1 percent witho&t inc&rring any
additional e4&ity !inancing. The !irm maintains a constant de+t-e4&ity ratio o! .0.11< a total
asset t&rno,er ratio o! 1..0< and a pro!it margin o! 8.0 percent. /hat m&st the di,idend payo&t
ratio +e#
A. )2.)2 percent
0. .7.75 percent
C. 48.)8 percent
%. 21.1. percent
E. 5..54 percent
(et&rn on e4&ity D 0.08 1..0 B1 E 0.11C D 0.171.1
>&staina+le growth D G0.171.1 +HFG1 - B0.171.1 +CH D .01K + D 0.)2)2
Payo&t ratio D 1 - 0.)2)2 D 5..54 percent

AACSB: Analytic
Section: 44
!o"ic: #ayout ratio

4-)7
12. Cross Town '"press has sales o! 31.)<000< net income o! 31)<200< total assets o! 387<000<
and total e4&ity o! 341<000. The !irm paid 35<120 in di,idends and maintains a constant
di,idend payo&t ratio. C&rrently< the !irm is operating at !&ll capacity. All costs and assets
,ary directly with sales. The !irm does not want to o+tain any additional e"ternal e4&ity. At
the s&staina+le rate o! growth< how m&ch new total de+t m&st the !irm ac4&ire#
A. 30
0. 34<.11
C. 31<878
%. 32<)05
E. 32<271
%i,idend payo&t ratio D 35<120F31)<200 D 0.20
(etention ratio D 1 - 0.20 D 0.40
>&staina+le growth D GB31)<200F341<000C 0.40HFI1 - GB31)<200F341<000C 0.40HJ D
0.1)21)2
Pro-ected total assets D 387<000 1.1)21)2 D 3110<.20..1
C&rrent de+t D 387<000 - 341<000 D 31.<000
Pro-ected e4&ity D 341<000 E B31)<200 1.1)21)2 0.40C D 310<251.27
?et de+t re4&ired D 3110<.20..1 - 31.<000 - 310<251.27 D 32<271

AACSB: Analytic
Section: 44

15. The Two >isters has a 8 percent ret&rn on assets and a 51 percent retention ratio. /hat is
the internal growth rate#
A. 2.10 percent
0. 2.51 percent
C. 2.85 percent
D. 5.)4 percent
'. 5..7 percent
*nternal growth rate D B0.08 0.51CFG1 - B0.08 0.51CH D 5.)4 percent

AACSB: Analytic
Difficulty: Basic
Section: 44

4-)8
17. The %og :o&se has net income o! 3.<410 and total e4&ity o! 37<200. The de+t-e4&ity ratio
is 0.20 and the payo&t ratio is )0 percent. /hat is the internal growth rate#
A. 14.45 percent
0. 15.57 percent
C. )1.08 percent
%. )8.40 percent
'. ..... percent
Total assets D 37<200 B1 E 0.20C D 31.<520
(et&rn on assets D 3.<410F31.<520 D .)105)5
*nternal growth D G.)105)5 B1 - 0.)0HFG1 - B.)105)5 B1 - 0.)0CH D )1.08 percent

AACSB: Analytic
Section: 44

4-.0

18. /hat is @a-or @an&scripts< *nc.=s retention ratio#
A. .. percent
0. 40 percent
C. 10 percent
D. 20 percent
'. 25 percent
(etention ratio D B3)<.52 - 3810CF3)<.52 D 20 percent

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: (etention ratio

4-.1
20. @a-or @an&scripts< *nc. does not want to inc&r any additional e"ternal !inancing. The
di,idend payo&t ratio is constant. /hat is the !irm=s ma"im&m rate o! growth#
A. 5.44 percent
0. 5.57 percent
C. 8.)2 percent
%. 8.51 percent
'. 10.80 percent
(etention ratio D B3)<.52 - 3810CF3)<.52 D 0.20
*nternal growth rate D GB3)<.52F3)0<180C 0.20HFI1 - GB3)<.52F3)0<180C 0.20HJ D 5.44
percent

AACSB: Analytic
Difficulty: Basic
Section: 44

21. *! @a-or @an&scripts< *nc. decides to maintain a constant de+t-e4&ity ratio< what rate o!
growth can it maintain ass&ming that no additional e"ternal e4&ity !inancing is a,aila+le.
A. 10.). percent
0. 10.48 percent
C. 10.80 percent
%. 11.)5 percent
'. 11.21 percent
(etention ratio D B3)<.52 - 3810CF3)<.52 D 0.20
>&staina+le growth rate D IG3)<.52FB310<000 E 34<110CH 0.20JFBe"pression errorC D 10.80
percent

AACSB: Analytic
Difficulty: Basic
Section: 44

4-.)
2). @a-or @an&scripts< *nc. is c&rrently operating at ma"im&m capacity. All costs< assets< and
c&rrent lia+ilities ,ary directly with sales. The ta" rate and the di,idend payo&t ratio will
remain constant. :ow m&ch additional de+t is re4&ired i! no new e4&ity is raised and sales are
pro-ected to increase +y 7 percent#
A. -3115
0. -327
C. 3)41
%. 3.47
'. 3.25
Pro-ected total assets D 3)0<180 1.07 D 3))<).5
Pro-ected acco&nts paya+le D 3.<.00 1.07 D 3.<124
C&rrent long-term de+t D 3)<570
C&rrent common stoc D 310<000
Pro-ected retained earnings D 34<110 E GB3)<.52 - 3810C 1.07H D 32<010
Additional de+t re4&ired D 3))<).5 - 3.<124 - 3)<570 - 310<000 - 32<010 D -3115

AACSB: Analytic
Section: 4&

4-..
2.. @a-or @an&scripts< *nc. is c&rrently operating at 71 percent o! capacity. All costs and net
woring capital ,ary directly with sales. The ta" rate< the pro!it margin< and the di,idend
payo&t ratio will remain constant. :ow m&ch additional de+t is re4&ired i! no new e4&ity is
raised and sales are pro-ected to increase +y 11 percent#
A. -3710
B. -3512
C. -324)
%. 3)44
'. 3.17
Pro-ected c&rrent assets D 38<180 1.11 D 310<127.10
Pro-ected capacity le,el D 0.71 1.11 D 0.8551 B/ill not e"ceed e"cess capacity.C
Pro-ected !i"ed assets D 311<400
Pro-ected acco&nts paya+le D 3.<.00 1.11 D 3.<581
C&rrent long-term de+t D 3)<570
C&rrent common stoc D 310<000
Pro-ected retained earnings D 34<110 E GB3)<.52 - 3810C 1.11H D 32<148.80
Additional de+t re4&ired D 310<127.10 E 311<400 - 3.<581 - 3)<570 - 310<000 - 32<148.80 D -
3512

AACSB: Analytic
Section: 4&

24. Ass&me the pro!it margin and the payo&t ratio o! @a-or @an&scripts< *nc. are constant. *!
sales increase +y 2 percent< what is the pro !orma retained earnings#
A. 31<))0.17
0. 31<5)1.4)
C. 32<0)1.12
%. 32<247.4)
'. 35<0)7.12
Pro !orma retained earnings D 34<110 E GB3)<.52 - 3810C 1.02CH D 32<0)1.12

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: #ro for,a

4-.4
21. Ass&me that @a-or @an&scripts< *nc. is c&rrently operating at 81 percent o! capacity and
that sales are pro-ected to increase to 3)0<000. /hat is the pro-ected addition to !i"ed assets#
A. 30
B. 31<48.
C. 31<1)8
%. 31<142
'. 31<177
C&rrent ma"im&m capacity D 312<700F.81 D 315<274.)1
(e4&ired addition to !i"ed assets D GB311<400F315<274.)1C 3)0<000H - 311<400 D 31<48.

AACSB: Analytic
Section: 4&
!o"ic: +i/e' assets

4-.1
22. All o! Fae >tone=s costs and net woring capital ,ary directly with sales. >ales are
pro-ected to increase +y ..1 percent. /hat is the pro !orma acco&nts recei,a+le +alance !or
ne"t year#
A. 31<218.70
0. 31<221.74
C. 31<570.)0
%. 31<575.70
'. 31<700.42
Pro !orma acco&nts recei,a+le D 31<5)0 B1 E .0.1C D 31<570.)0

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: #ro for,a

25. The pro!it margin< the de+t-e4&ity ratio< and the di,idend payo&t ratio !or Fae >tone< *nc.
are constant. >ales are e"pected to increase +y 31<02) ne"t year. /hat is the pro-ected
addition to retained earnings !or ne"t year#
A. 38)..4
0. 3177.11
C. 31<808.12
D. 3)<144..4
'. 3)<.72.07
Pro-ected change in retained earnings D GB3).<200 E 31<02)CF3).<200H B3.<4)0 - 31<.27C D
3)<144..4

AACSB: Analytic
Difficulty: Basic
Section: 4&

4-.2
27. Ass&me that Fae >tone< *nc. is operating at !&ll capacity. Also ass&me that all costs< net
woring capital< and !i"ed assets ,ary directly with sales. The de+t-e4&ity ratio and the
di,idend payo&t ratio are constant. /hat is the pro !orma net !i"ed asset ,al&e !or ne"t year i!
sales are pro-ected to increase +y 5.1 percent#
A. 318<700
B. 3)1<050
C. 3).<200
%. 3)4<)40
'. 3)2<710
Pro !orma net !i"ed assets D 318<200 B1 E 0.051C D 3)1<050

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: #ro for,a

28. Ass&me that Fae >tone< *nc. is operating at 77 percent o! capacity. All costs and net
woring capital ,ary directly with sales. /hat is the amo&nt o! the pro !orma net !i"ed assets
!or ne"t year i! sales are pro-ected to increase +y 1. percent#
A. 318<200
0. 3)0<402
C. 3)1<100
%. 3)1<225
'. 3))<147
Pro !orma capacity le,el D 0.77 B1 E 0.1.C D 88.44 percent.
?o additional !i"ed assets are re4&ired. Th&s< !i"ed assets will remain at 318<200.

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: +i/e' assets

4-.5
50. Ass&me that Fae >tone< *nc. is operating at !&ll capacity. Also ass&me that assets< costs<
and c&rrent lia+ilities ,ary directly with sales. The di,idend payo&t ratio is constant. /hat is
the e"ternal !inancing need i! sales increase +y 1) percent#
A. -3.17.08
0. -3)27.48
C. 310..1.
%. 3.10.40
E. 3420.12
'"ternal !inancing needed D B1.1) 3)1<420C - B1.1) 3)<450C - 37<700 - 310<000 - 34<180 -
G3.<4)0 - 31<.27 1.1)H D 3420.12

AACSB: Analytic
Difficulty: Basic
Section: 44

51. Fae >tone< *nc. is pro-ecting sales to decrease +y 4 percent ne"t year while the pro!it
margin remains constant. The !irm wants to increase the di,idend payo&t ratio +y ) percent.
/hat is the pro-ected increase in retained earnings !or ne"t year#
A. 31<511.11
0. 31<787.25
C. 31<84..21
%. 31<828.8)
'. 3)<101.2.
Pro-ected di,idend payo&t ratio D B31<.27F3.<4)0C 1.0) D 0.407
(etention ratio D 1 - 0.407 D 0.18)
Pro-ected increase in retained earnings D 3.<4)0 B1 - 0.04C 0.18) D 31<84..21

AACSB: Analytic
Difficulty: Basic
Section: 4&

4-.7
5). /hat is the internal growth rate o! Fae >tone< *nc. ass&ming the payo&t ratio remains
constant#
A. 1.)0 percent
0. 1.11 percent
C. 5..2 percent
%. 5.48 percent
E. 7.55 percent
*nternal growth D IB3.<4)0F3)1<420C G1 - B31<.27F3.<4)0CHJFBe"pression errorC D 7.55
percent

AACSB: Analytic
Difficulty: Basic
Section: 44

5.. /hat are the pro !orma retained earnings !or ne"t year i! Fae >tone< *nc. grows at a rate
o! ).1 percent and +oth the pro!it margin and the di,idend payo&t ratio remain constant#
A. 34<842.80
0. 31<0)..10
C. 31<18).)0
%. 31<8)0.25
E. 32<)8...0
Pro !orma retained earnings D 34<180 E GB3.<4)0 - 31<.27C 1.0)1CH D 32<)8...0

AACSB: Analytic
Difficulty: Basic
Section: 44

4-.8
54. Ass&me that net woring capital and all o! the costs o! Fae >tone< *nc. increase directly
with sales. Also ass&me that the ta" rate and the di,idend payo&t ratio are constant. The !irm
is c&rrently operating at !&ll capacity. /hat is the e"ternal !inancing need i! sales increase +y
4 percent#
A. -31<)14.47
0. -3704.11
C. -3.85.18
%. 3)01.12
'. 31)1..7
Pro-ected total assets D 3)1<420 1.04 D 3)2<457.40
Pro-ected acco&nts paya+le D 3)<450 1.04 D 3)<127.70
Pro-ected retained earnings D 34<180 E GB3.<4)0 - 31<.27C 1.04H D 32<.)4.07
'"ternal !inancing need D 3)2<457.40 - 3)<127.70 - 37<700 - 310<000 - 32<.)4.07 D -
31<)14.47

AACSB: Analytic
Difficulty: Basic
Section: 44

4-40

51. :&ngry :owie=s is c&rrently operating at 57 percent o! capacity. /hat is the !&ll-capacity
le,el o! sales#
A. 3)1<102.00
0. 3)1<170.2)
C. 3))<158.48
%. 3)4<102.15
'. 3)1<.01.81
F&ll-capacity sales D 315<.00F0.57 D 3))<158.48

AACSB: Analytic
Difficulty: Basic
Section: 4&
!o"ic: Ca"acity level sales

4-41
52. :&ngry :owie=s is c&rrently operating at 7) percent o! capacity. /hat is the total asset
t&rno,er ratio at !&ll capacity#
A. .27
0. .57
C. .81
%. 1.)8
E. 1.42
F&ll-capacity sales D 315<.00F0.7) D 3)1<085.12
Total asset t&rno,er at !&ll-capacity D 3)1<085.12F314<100 D 1.42

AACSB: Analytic
Section: 4&
!o"ic: !otal asset turnover

55. :&ngry :owie=s is c&rrently operating at 82 percent o! capacity. The pro!it margin and the
di,idend payo&t ratio are pro-ected to remain constant. >ales are pro-ected to increase +y .
percent ne"t year. /hat is the pro-ected addition to retained earnings !or ne"t year#
A. 31<.08.18
B. 31<4)1.40
C. 31<774.80
%. 3)<225.57
'. 3.<001.40
Pro-ected addition to retained earnings D 31<.70 B1 E .0.C D 31<4)1.40

AACSB: Analytic
Difficulty: Basic
Section: 4&

4-4)
57. :&ngry :owie=s is c&rrently operating at !&ll capacity. The pro!it margin and the di,idend
payo&t ratio are held constant. ?et woring capital and !i"ed assets ,ary directly with sales.
>ales are pro-ected to increase +y 11 percent. /hat is the e"ternal !inancing needed#
A. -3182.10
B. -3147.00
C. -385.)0
%. -314.10
'. 3)2.70
Pro-ected total assets D 314<100 1.11 D 312<081
Pro-ected acco&nts paya+le D 31<8)0 1.11 D 3)<1.1.)0
Pro-ected retained earnings D 31<170 E B31<.70 1.11C D 3.<111.70
'"ternal !inancing need D 312<081 - 3)<1.1.)0 - 3.<100 - 35<100 - 3.<111.70 D -3147

AACSB: Analytic
Difficulty: Basic
Section: 44

58. :&ngry :owie=s maintains a constant payo&t ratio. The !irm is c&rrently operating at !&ll
capacity. /hat is the ma"im&m rate at which the !irm can grow witho&t ac4&iring any
additional e"ternal !inancing#
A. 8.54 percent
B. 10.1) percent
C. 11.02 percent
%. 11.17 percent
'. 1).). percent
*nternal growth D GB31<7.0F314<100C B31<.70F31<7.0CHFI1 - GB31<7.0F314<100C
B31<.70F31<7.0CHJ D 10.1) percent

AACSB: Analytic
Difficulty: Basic
Section: 44

4-4.
70. :&ngry :owie=s is c&rrently operating at 84 percent o! capacity. /hat is the re4&ired
increase in !i"ed assets i! sales are pro-ected to increase +y 14 percent#
A. 30
0. 3111
C. 32..
%. 3507
E. 3555
F&ll-capacity sales D 315<.00F.84 D 317<404.)2
(e4&ired increase in !i"ed assets D B310<710F317<404.)2C B315<.00 1.14C - 310<710 D 3555

AACSB: Analytic
Section: 4&
!o"ic: +i/e' assets

Essay Questions

71. /hy do !inancial managers need to &nderstand the implications o! +oth the internal and
the s&staina+le rates o! growth#
/oring capital< !i"ed assets< and e"ternal !inancing m&st coordinate with and +e a+le to
s&pport a !irm=s sales growth. *!< !or e"ample< a pro-ected increase in sales re4&ires e"ternal
!inancing when no s&ch !inancing is a,aila+le< then the !irm cannot grow at the desired rate.
Lnderstanding the implications o! +oth the internal and the s&staina+le growth rates helps
managers &nderstand the need to limit growth so that the !irm does not attempt to o&tgrow its
reso&rces.
Feed+ac6 (e!er to section 4.4

AACSB: (eflective t$in0ing
Difficulty: Basic
Section: 44
!o"ic: 1ro*t$ li,itations

4-44
7). *denti!y the !o&r primary determinants o! a !irm=s growth and e"plain how each !actor
co&ld either add to or limit the growth potential o! a !irm.
The !o&r !actors are6


Section: 44
!o"ic: Deter,inants of gro*t$

4-41
7.. AC /hat are the ass&mptions that &nderlie the internal growth rate and 0C what are the
implications o! this rate#
The +asic ass&mptions are6 Costs and net woring capital increase proportionately with sales.
Fi"ed assets also increase proportionately with sales once prod&ction reaches !&ll capacity.
The di,idend payo&t ratio is constant. ?o additional e"ternal !inancing o! any ind is
permissi+le.
The implication is that !irms are limited to a rate o! growth e4&al to the internal growth rate so
long as e"ternal !inancing remains limited at its c&rrent le,el. *n other words< the internal
growth rate is the ma"im&m rate o! growth a !irm can achie,e +ased on internally generated
!&nds.

Section: 44

74. ?elson=s Landscaping >er,ices -&st completed a pro !orma statement &sing the percentage
o! sales approach. The pro !orma has a pro-ected e"ternal !inancing need o! -31<100. /hat are
the !irm=s options in this case#
/ith a negati,e e"ternal !inancing need< the !irm has a s&rpl&s o! !&nds that it can &se to
red&ce c&rrent lia+ilities< red&ce long-term de+t< +&y +ac common stoc< or increase
di,idends. *! accepta+le opport&nities e"ist< the !irm might also &se the e"tra !&nds to
p&rchase !i"ed assets there+y increasing its ma"im&m capacity le,el< sho&ld that need +e
anticipated.
Feed+ac6 (e!er to section 4..

Section: 4&

4-42
71. >mith M %a&ghters is getting ready to compile pro !orma statements !or the ne"t !ew
years. :ow can the managers esta+lish a reasona+le range o! growth rates that they sho&ld
consider d&ring this planning process#
The internal growth rate esta+lishes the minim&m desired rate o! growth while the s&staina+le
growth rate identi!ies the ma"im&m s&pporta+le le,el o! growth. These growth rates
e!!ecti,ely determine the range o! rates than managers sho&ld consider.

Section: 44
!o"ic: 1ro*t$ rates

4-45
Multiple Choice Questions

72. The most recent !inancial statements !or /atchtower< *nc. are shown here Bass&ming no
income ta"esC6

Assets and costs are proportional to sales. %e+t and e4&ity are not. ?o di,idends are paid.
?e"t year=s sales are pro-ected to +e 31<00). /hat is the amo&nt o! the e"ternal !inancing
need#
A. 3185
B. 3)0.
C. 3)11
%. 3)17
'. 3)).
>ales increase D B31<00) - 34<100CF34<100 D 0.))
'"ternal !inancing need D 311<114 - 310<811 D 3)0.

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-&
Section: 4&

4-47
75. The most recent !inancial statements !or Last in Line< *nc. are shown here6

Assets and costs are proportional to sales. %e+t and e4&ity are not. A di,idend o! 388) was
paid< and the company wishes to maintain a constant payo&t ratio. ?e"t year=s sales are
pro-ected to +e 3)1<7.0. /hat is the amo&nt o! the e"ternal !inancing need#
A. 31)<511
0. 31.<...
C. 31.<112
%. 31.<708
E. 314<.15
>ales increase D B3)1<7.0 - 317<100CF317<100 D 0.17
'"ternal !inancing need D 3101<2)) - 381<)21 D 314<.15

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-4
Section: 4&

4-48
77. The most recent !inancial statements !or 5 >eas< *nc. are shown here6

Assets< costs< and c&rrent lia+ilities are proportional to sales. Long-term de+t and e4&ity are
not. The company maintains a constant 10 percent di,idend payo&t ratio. Lie e,ery other
!irm in its ind&stry< ne"t year=s sales are pro-ected to increase +y e"actly 12 percent. /hat is
the e"ternal !inancing need#
A. 31<)41.52
0. 31<411.12
C. 31<17..08
%. 3)<)11.75
'. 3)<.48.87
'"ternal !inancing need D 31.<028.5) - 311<7)5.82 D 31<)41.52

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-2
Section: 4&

4-10
78. The most recent !inancial statements !or 0enatar Co. are shown here6

Assets and costs are proportional to sales. %e+t and e4&ity are not. The company maintains a
constant 40 percent di,idend payo&t ratio. ?o e"ternal e4&ity !inancing is possi+le. /hat is
the internal growth rate#
A. ).81 percent
0. ..44 percent
C. ..75 percent
%. 4.0) percent
'. 4.14 percent
*nternal growth rate D GB3)<221.)2F34)<77.C B1 - 0.40CHFI1 - GB3)<221.)2F34)<77.C B1 -
0.40CHJ D ..75 percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-5
Section: 44

4-11
80. The most recent !inancial statements !or :eng Co. are shown here6

Assets and costs are proportional to sales. The company maintains a constant 40 percent
di,idend payo&t ratio and a constant de+t-e4&ity ratio. /hat is the ma"im&m increase in sales
that can +e s&stained ne"t year ass&ming no new e4&ity is iss&ed#
A. 34<707.1)
0. 31<)11.15
C. 31<875.47
D. 32<48..54
'. 32<222.25
(et&rn on e4&ity D 31.<027F354<)10 D 0.152
(etention ratio D 1 - .40 D .20
>&staina+le growth rate D B0.152 .20CFG1 - B0.152 .20CH D .117027
@a"im&m increase in sales D 311<000 .117027 D 32<48..54

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-6
Section: 44

4-1)
81. Consider the income statement !or :eir Nordan Corporation6

A )) percent growth rate in sales is pro-ected. /hat is the pro !orma addition to retained
earnings ass&ming all costs ,ary proportionately with sales#
A. 32<)88
0. 35<.0.
C. 35<780
%. 37<011
E. 37<124
(etention ratio D 32<28)F310<140 D .21882
Pro !orma addition to retained earnings D 31)<.50.70 .21882 D 37<124

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-7
Section: 4&

4-1.
8). The >occer >hoppe has a 5 percent ret&rn on assets and a )1 percent payo&t ratio. /hat is
its internal growth rate#
A. ..5) percent
0. 4.07 percent
C. 4.48 percent
%. 1.). percent
E. 1.14 percent
(etention ratio D 1 - 0.)1 D 0.51
*nternal growth rate D B0.05 0.51CFG1 - B0.05 0.51CH D 1.14 percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-1-
Section: 44

8.. The Parodies Corp. has a )) percent ret&rn on e4&ity and a ). percent payo&t ratio. /hat
is its s&staina+le growth rate#
A. 17.27 percent
0. 18.)1 percent
C. 18.48 percent
D. )0..8 percent
'. )).00 percent
(etention ratio D 1 - 0.). D 0.55
>&staina+le growth rate D B0.)) 0.55CFG1 - B0.)) 0.55CH D )0..8 percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-1&
Section: 44

4-14
84. Consider the !ollowing in!ormation !or Kale+=s Kic+o"ing6

/hat is the s&staina+le rate o! growth#
A. 1..75 percent
0. 14.)8 percent
C. 14.21 percent
%. 11.4) percent
'. 11.17 percent
(et&rn on e4&ity D .077 B1F0.14C B1 E 0.20C D 0.)205
(etention ratio D 1 - B311<710F3.1<000C D 0.48
>&staina+le growth rate D B.)205 0.48CFG1 - B.)205 0.48CH D 14.21 percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-14
Section: 44

4-11
81. /hat is the s&staina+le growth rate ass&ming the !ollowing ratios are constant#

A. 10..0 percent
B. 10.1. percent
C. 10.25 percent
%. 10.78 percent
'. 11.01 percent
(et&rn on e4&ity D .07 1.42 1.)0 D 0.14012
(etention ratio D 1 - 0..) D 0.27
>&staina+le growth rate D B.14012 0.27CFG1 - B0.14012 0.27CH D 10.1. percent

AACSB: Analytic
Difficulty: Basic
.OC 4: 4-12
Section: 44

82. >eaweed @!g.< *nc. is c&rrently operating at only 71 percent o! !i"ed asset capacity.
C&rrent sales are 3110<000. /hat is the ma"im&m rate at which sales can grow +e!ore any
new !i"ed assets are needed#
A. 14.). percent
0. 14.45 percent
C. 11.0. percent
%. )).75 percent
E. )..42 percent
F&ll capacity sales D 3110<000F0.71 D 3258<01)
@a"im&m sales growth D B258<01)F3110<000C - 1 D )..42 percent

AACSB: Analytic
.OC 4: 4-15
Section: 4&
!o"ic: Sales gro*t$

4-12
85. >eaweed @!g.< *nc. is c&rrently operating at only 72 percent o! !i"ed asset capacity. Fi"ed
assets are 3.75<000. C&rrent sales are 3110<000 and are pro-ected to grow to 3224<000. /hat
amo&nt m&st +e spent on new !i"ed assets to s&pport this growth in sales#
A. 30
0. 3))<214
C. 342<.18
%. 358<407
'. 38.<207
F&ll capacity sales D 3110<000F0.72 D 318.<0)..)2
Capital intensity ratio D 3.75<000F318.<0)..)2 D 0.21)177).1
Fi"ed asset need D B3224<000 0.21)177).1C - 3.75<000 D 342<.18

AACSB: Analytic
.OC 4: 4-18
Section: 4&
!o"ic: +i/e' asset nee'

87. Fi"ed Appliance Co. wishes to maintain a growth rate o! 7 percent a year< a constant de+t-
e4&ity ratio o! 0..4< and a di,idend payo&t ratio o! 1) percent. The ratio o! total assets to sales
is constant at 1... /hat pro!it margin m&st the !irm achie,e#
A. 1..8) percent
0. 14.42 percent
C. 14.85 percent
%. 11... percent
'. 11.54 percent
(etention ratio D 1 - 0.1) D 0.47
>&staina+le growth rate D 0.07 D B(A' 0.47CFG1 - B(A' 0.47CHK (A' D 0.114.
(et&rn on e4&ity D 0.114. D P@ B1F1..C B1 E 0..4CK Pro!it margin D 14.85 percent

AACSB: Analytic
.OC 4: 4-16
Section: 44

4-15
88. A !irm wishes to maintain a growth rate o! 7 percent and a di,idend payo&t ratio o! 2)
percent. The ratio o! total assets to sales is constant at 1< and the pro!it margin is 10 percent.
/hat m&st the de+t-e4&ity ratio +e i! the !irm wishes to eep that ratio constant#
A. 0.01
0. 0.40
C. 0.11
%. 0.20
E. 0.81
(etention ratio D 1 - 0.2) D 0..7
>&staina+le growth rate D 0.07 D B(A' 0..7CFG1 - B(A' 0..7CHK (A' D 0.1848
(et&rn on e4&ity D 0.1848 D 0.10 B1F1C B1 E %F'CK %F' D 0.81

AACSB: Analytic
.OC 4: 4-17
Section: 44
!o"ic: Debt-e3uity ratio

100. A !irm wishes to maintain an internal growth rate o! 11 percent and a di,idend payo&t
ratio o! )4 percent. The c&rrent pro!it margin is 10 percent and the !irm &ses no e"ternal
!inancing so&rces. /hat m&st the total asset t&rno,er rate +e#
A. 0.75 times
0. 0.80 times
C. 1.01 times
%. 1.11 times
E. 1..0 times
(etention ratio D 1 - 0.)4 D 0.52
*nternal growth rate D 0.11 D B(AA 0.52CFG1 - B(AA 0.52CHK (AA D 0.1.04
(et&rn on assets D 0.1.04 D 0.10 TATK Total asset t&rno,er D 1..0 times

AACSB: Analytic
.OC 4: 4--9
Section: 44
!o"ic: !otal asset turnover

4-17
101. 0ased on the !ollowing in!ormation< what is the s&staina+le growth rate o! :endri"
G&itars< *nc.#

A. 5.27 percent
B. 8.1) percent
C. 11.1) percent
%. 1..48 percent
'. 14.41 percent
Total de+t ratio D 0.22 D T%FTA
TAFT% D 1F0.22
1 E T%FT' D 1F0.22
%F' D 1FGB1F0.22C - 1H D 1.841152
(et&rn on e4&ity D 0.012 1.52 B1 E 1.841152C D 0.)7877)
(etention ratio D 1 - 0.5 D 0..
>&staina+le growth rate D B0.)7877) 0..CFG1 - B0.)7877) 0..CH D 8.1) percent

AACSB: Analytic
.OC 4: 4--1
Section: 44

4-18
10). Co&ntry Com!ort< *nc. had e4&ity o! 3110<000 at the +eginning o! the year. At the end o!
the year< the company had total assets o! 3181<000. %&ring the year< the company sold no new
e4&ity. ?et income !or the year was 35)<000 and di,idends were 344<240. /hat is the
s&staina+le growth rate#
A. 11..) percent
0. 11.58 percent
C. 15.57 percent
%. 17.01 percent
E. 17.)4 percent
'nding e4&ity D 3110<000 E B35)<000 - 344<240C D 3155<.20
(et&rn on e4&ity D 35)<000F3155<.20 D 0.4020
(etention ratio D B35)<000 - 344<240CF35)<000 D 0..7
>&staina+le growth rate D B0.4020 0..7CFG1 - B0.4020 0..7CH D 17.)4 percent

AACSB: Analytic
.OC 4: 4--&
Section: 44

4-20
10.. The most recent !inancial statements !or @oose To&rs< *nc. !ollow. >ales !or )008 are
pro-ected to grow +y 12 percent. *nterest e"pense will remain constantK the ta" rate and
di,idend payo&t rate will also remain constant. Costs< other e"penses< c&rrent assets< and
acco&nts paya+le increase spontaneo&sly will sales. *! the !irm is operating at !&ll capacity and
no new de+t or e4&ity is iss&ed< how m&ch e"ternal !inancing is needed to s&pport the 12
percent growth rate in sales#

A. 3-10<)42
B. -37<1))
C. -32<507
%. 3)<405
'. 3.<.08
4-21
%i,idends D B344<24)F3111<202C 31.1<250 D 31)<227
Addition to retained earnings D 31.1<250 - 31)<227 D 358<00)
'nding retained earnings D 3)27<000 E 358<00) D 3.45<00)
'"ternal !inancing need D 3180<440 - 3187<12) D -37<1))

AACSB: Analytic
.OC 4: 4--2
Section: 4&

4-2)

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Chapter 04 - Long-Term Financial Planning and Growth

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