Term
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Definition
| the proportion of net income paid out (distributed) as dividends |
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Term
| external funding needed (EFN) |
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Definition
| the additional debt or equity a firm must raise from external sources to meet its total funding requirements |
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Term
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Definition
| a plan outlining the investments a firm intends to make and how it will finance them |
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Term
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Definition
| the process by which management decides what types of investments the firm needs to make and how to finance those investments |
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Term
| internal growth rate (IGR) |
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Definition
| the maximum growth rate that a firm can achieve without external financing |
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Term
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Definition
| fixed assets added as large, discrete units; these assets may not be used to full capacity for some time, leaving the company with excess capacity |
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Term
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Definition
| a simple financial planning model that assumes that most income statement and balance sheet accounts vary proportionally with sales |
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Term
| pro forma financial statements |
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Definition
| projected financial statements that reflect a set of assumptions concerning investment, financing, and operating decisions |
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Term
| retention (plowback) ratio |
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Definition
| the proportion of net income retained in the firm |
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Term
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Definition
| the process by which management establishes the firm's long-term goals, the strategies that will be used to achieve those goals, and the capabilities that are needed to sustain the firm's competitive position |
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Term
| sustainable growth rate (SGR) |
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Definition
| the rate of growth that a firm can sustain without selling additional equity while maintaining the same capital structure |
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Term
| The higher a firm's dividend payout ratio, the higher the firm's internal growth rate. |
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Definition
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Term
| One statement that is NOT true about more sophisticated financial planning model is that: |
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Definition
working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales.
XX only fixed costs change directly with sales.
all of these are true.
fixed assets do not always vary directly with sales. |
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Term
| In using more sophisticated planning models, which one of the following statements is NOT true? |
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Definition
XX All of these are true.
Retained earnings will vary as sales changes but not directly as it is affected by the firm's dividend payout policy.
Current liabilities are likely to vary directly with sales.
Long-term liabilities and equity accounts change as a direct result of managerial decisions. |
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Term
| Which one of the following statements about the sustainable growth rate (SGR) is NOT true? |
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Definition
None of these.
The higher a firm's ROE, the higher the SGR.
XX Both statements are true.
The higher the plowback ratio, the larger the proportion of net income retained in the firm and the greater the firm's SGR. |
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Term
| Addition to retained earnings: Tangent, Inc., has revenues of $4,375,233 and costs of $2,467,321, and pays a tax rate of 34 percent. If the firm pays out 60 percent of its earnings as dividends every year, what is the amount of retained earnings? |
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Definition
Revenue = $4,375,233
Costs = $2,467,321;
Tax rate = 34%
Payout ratio = 60%
Net income = ($4,375,233 - $2,467,321)(1-0.34)
= $1,259,221.92
Retained earnings
= 1,259,221.92 (1 - 0.60)
= $503,688.77 |
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Term
| Payout and retention ratio: Drekker, Inc., has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm's dividend payout ratio and retention ratio. |
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Definition
Drekker Inc.
Revenues 312,766.00
Costs 220,220.00
____________________
EBIT 92,544.00
Interest 31,477.00
____________________
EBT 61,067.00
Taxes-34% 20,762.78
Net income 40,304.22
Dividends paid = $34,125
Dividend payout ratio = dividends/net income
= 34,125.00/40,304.22 = 84.7%
Retention ratio = (1-dividend payout ratio) = (1-0.75) = 15% |
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Term
| Capital intensity ratio: Michael Holdings, Inc., has total assets of $1,480,072 and sales of $2,236,625. What is the firm's capital intensity ratio? |
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Definition
Total assets = $1,480,072
Sales = $2,236,625
Capital intensity ratio =
total assets/net sales
- 1,480,072/2,236,625 = 66.17% |
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Term
| Capital intensity ratio: Dennis Compton, Inc., has total assets of $5,335,901 and a capital intensity of 53.9%. What is the firm's sales? |
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Definition
Total assets = $5,335,901
Capital intensity ratio = 53.9%
capital intensity ratio =
total assets/net sales
0.539 = $5,335,901/net sales |
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Term
| External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support? |
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Definition
Total assets = $4,417,665
Net income = $2,771,342
EFN = $0
Addition to retained earnings = $2,771,342 x (1 - 0.60) = $1,108,536.80
EFN = (initial assets x growth rate)- addition to retained earnings
$0 = ($4,417,665 x growth rate) - $1,108,536.80
$1,108,536.80 = $4,417,665 x growth rate
growth rate = $1,108,536.80/$4,417,665 = 25.1% |
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Term
| Sustainable growth rate: Courtney Bike Company has a net profit margin of 7.8 percent, a debt ratio of 45 percent, total assets of $2,112,370, and sales of $4,276,990. If the company has a dividend payout ratio of 60 percent, what is the company's sustainable growth rate? |
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Definition
Net profit margin = 7.8%
Debt ratio = 45%
Total assets = $2,112,370
Sales = $4,276,990
Dividend payout ratio = 60%
plowback ratio = (1-0.60)= 40%
Net PM = net income/sales
net income = sales x Net PM
= $4,276,990 x 0.078
= $333,605.22
Equity ratio = 1 - debt ratio
= 1 - 0.45 = 55%
Equity = 0.55 x $2,112,370
= $1,161,803.50
SGR = net income/equity x plowback ratio
= $333,605.22/$1,161,803.50 x 0.40
= 11.49% |
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