Q&A Hero

Q: In putting together a financial plan, management addresses three main issues through their strategic plan, investment plan, and financing plan. A) True B) False

Q: Financial planning deals with establishing sales forecasts for a time horizon set by a firm's management. A) True B) False

Q: Explain the sustainable growth rate and discuss what it means to a firm's management.

Q: Discuss the implications of the internal growth rate.

Q: Explain how the strategic plan, investment plan, and financing plan integrate to help management do financial planning.

Q: Courtney Bike, Co. 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? (Do not round intermediate calculations. Round final answer to one decimal place.)A) 17.2%B) 15.6%C) 11.5%D) 18.9%

Q: Sterling Inc. currently has sales of $4,512,644 and net income of $736,253. It has a debt ratio of 47 percent and a dividend payout ratio of 65 percent. The company has total assets of $3,812,832. What is the company's sustainable growth rate? (In your interim computations, round your ROE percentage to one decimal place.)A) 12.74%B) 23.72%C) 18.96%D) 20.10%

Q: If Merton Corp. has a ROE of 23.4 percent, what is the plowback ratio needed to achieve a sustainable growth rate of 7 percent? (Round to nearest whole number.) A) 34% B) 30% C) 24% D) 28%

Q: If Newell Corp. has a ROE of 18.6 percent and a dividend payout ratio of 60 percent, what is its sustainable growth rate? A) 7.44% B) 2.15% C) 0.47% D) 8.2%

Q: 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? (Round your final answer to one decimal place)A) 32.9%B) 25.1%C) 30.3%D) 27.3%

Q: Triumph Company has total assets worth $6,413,228. Next year it expects a net income of $3,145,778 and will pay out 70 percent as dividends. If the firm wants to limit its external financing to $1 million, what is the growth rate it can support? (Round your final answer to one decimal place.)A) 32.9%B) 6.4%C) 30.3%D) 26.5%

Q: Nederland Finance Company has total assets worth $9,751,223. It is expecting to grow its revenue at a rate of 20 percent next year and will have a net income of $2,213,564 next year. The firm pays out 65 percent of its net income as dividends. What is the external financing needed by this firm to meet its growth expectations?A) $1,175,497.20B) $511,428.00C) No external funding is needed.D) None of these

Q: Sterling Resorts Co. has total assets worth $13,442,975. It is expecting to grow its revenue at a rate of 25 percent next year. For next year, it expects a net income of $3,475,321 and will pay out 45 percent as dividends. What is the external financing needed by the firm to meet its growth expectations?A) $1,796,849.30B) $1,449,317.20C) No external funding is needed.D) None of these

Q: Meredith Inc. has a return on equity of 21.5 percent, an equity ratio of 55 percent, and a dividend payout ratio of 70 percent. What is the company's internal growth rate? (Round to two decimal places)A) 8.32%B) 3.55%C) 6.43%D) 4.84%

Q: Mandolin Bottlers Co. has net income of $4,272,335 and retains 65 percent of its income every year. If the company's internal growth rate is 8.6 percent, what is the firm's total assets? (Round your answer to the nearest dollar.)A) $32,290,904B) $238,824C) $30,388,235D) None of these

Q: Mercantile Co. has net income of $3,413,500 on assets of $16,109,445 and retains 55 percent of its income every year. What is the company's internal growth rate? (Do not round intermediate calculations. Round final answer to two decimal places.)A) 21.21%B) 8.62%C) 11.65%D) 9.43%

Q: Swan Supply Company has net income of $1,212,335 on assets of $12,522,788 and retains 70 percent of its income every year. What is the company's internal growth rate? (Do not round intermediate calculations. Round final answer to one decimal place.)A) 7.6%B) 6.8%C) 8.6%D) 9.3%

Q: Tradewinds Corp. has revenues of $9,651,220, costs of $6,080,412, interest payment of $511,233, and a tax rate of 34 percent. It paid dividends of $1,384,125 to shareholders. Find the firm's dividend payout ratio and retention ratio.(Round the percentage answer to nearest whole number.)A) 66%, 34%B) 25%, 75%C) 69%, 31%D) 34%, 66%

Q: Tangent Inc. has revenues of $4,375,233, 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? (Round final answer to two decimal places.)A) $171,254.18B) $755,533.15C) $503,688.77D) None of these

Q: Hilton Corp. has revenues of $1,214,800, costs of $816,355, and pays a tax rate of 32 percent. If the firm pays out 50 percent of its earnings as dividends every year, what is the amount of retained earnings? A) $135,471.30 B) $270,942.60 C) $413,032.00 D) None of these

Q: Which of the following statements about the sustainable growth rate (SGR) is true? A) The higher a firm's ROE, the higher the SGR. B) The higher the plowback ratio, the larger the proportion of net income retained in the firm and the greater the firm's SGR. C) Both A and B are true statements. D) None of these are true

Q: Which of the following statements about the sustainable growth rate (SGR) is NOT true? A) The SGR is a function of the plowback ratio and the ROE. B) The SGR determines the rate of growth that a firm can sustain without selling additional shares of equity. C) The SGR helps management to determine whether they can avoid issuing new debt. D) All of these

Q: The sustainable growth rate (SGR) A) is a function of the plowback ratio and the ROE. B) the rate of growth that a firm can sustain without selling additional shares of equity. C) helps management to determine whether they can avoid issuing new equity. D) All of these

Q: Firms that achieve higher growth rates without seeking external financing A) have a low plowback ratio. B) have less equity and/or are able to generate high net income leading to a high ROE. C) are highly leveraged. D) None of these

Q: Firms that achieve higher growth rates without seeking external financing A) have a high plowback ratio. B) have less equity and/or are able to generate high net income leading to a high ROE. C) are not highly leveraged. D) All of these

Q: Which of the following statements is NOT true? A) The internal growth rate (IGR) is defined as the maximum growth rate that a firm can achieve without external financing. B) The higher the retained earnings generated by a firm, the higher the growth possible without using external funding. C) Given the same level of retained earnings, a firm that has the higher amount of total assets has a higher growth possibility without using external funding. D) All of these

Q: External funding needed (EFN) is A) the additional debt or equity a firm needs to issue so that it can purchase additional assets to support an increase in sales. B) the additional funds raised by a firm to pay off existing short-term debt. C) the additional funds raised by a firm to pay off existing long-term debt. D) None of these

Q: Which of the following is NOT true about the capital budgeting process? A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders. B) Rapid growth is considered a desirable achievement in capital budgeting decisions. C) Once the list is made, no management review can change it. D) All of these

Q: Which of the following is true about the capital budgeting process? A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders. B) Rapid growth is considered a desirable achievement in capital budgeting decisions. C) The cost of the projects should comply with the firm's budget constraints. D) All of these

Q: Which of the following statements in accounting for changes in fixed assets is NOT true? A) When a firm is not operating at full capacity, sales may be decreased without adding any new fixed assets. B) Since it requires time to get new assets operational, they are added as the firm nears full capacity. C) Fixed assets are added in large discrete units called lumpy assets. D) All of these

Q: Which of the following statements in accounting for changes in fixed assets is NOT true? A) When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets. B) Since it requires time to get new assets operational, they are added in small discrete quantities. C) Fixed assets are added in large discrete units called lumpy assets. D) All of these

Q: Which of the following includes weaknesses in financial planning models? A) Interest expense is not accounted. B) All working capital accounts do not necessarily vary directly with sales, especially cash and inventory. C) The way fixed assets are handled as lumpy assets, leaving the company with excess capacity. D) All of these

Q: Which of the following statements in using more sophisticated planning models is true? A) Current liabilities are likely to vary directly with sales. B) Long-term liabilities and equity accounts change as a direct result of managerial decisions. C) Retained earnings will vary as sales changes but not directly as it is affected by the firm's dividend payout policy. D) All of these

Q: Which of the following statements in using more sophisticated planning models is NOT true? A) Current liabilities are likely to vary directly with sales. B) Long-term liabilities and equity accounts change as a direct result of managerial decisions. C) Retained earnings will vary directly as sales changes. D) All of these

Q: Dennis Compton, Inc. has total assets of $5,335,901 and a capital intensity of 53.9%. What is the firm's sales? (Round to nearest whole dollar.) A) $5,335,901 B) $2,828,028 C) $9,899,631 D) None of these

Q: Michael Holdings, Inc. has total assets of $1,480,072 and sales of $2,236,625. What is the firm's capital intensity ratio? (Round to two decimal places.)A) 66.17%B) 53.73%C) 151.14%D) None of these

Q: Comacho Traders has total assets of $513,480 and sales of $723,062. What is the firm's capital intensity ratio? (Round to two decimal places.)A) 1.41B) 0.71C) 1.23D) None of these

Q: 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. (Round your percentage answers to nearest whole number.)A) 85%, 15%B) 45%, 55%C) 55%, 45%D) 15%, 85%

Q: A firm paid out $163,961.60 as dividends on net income of $298,112. What is the firm's retention ratio?A) 55%B) 45%C) 50%D) None of these

Q: Which of the following statements is NOT true? A) The ratio of total assets to sales is called the capital intensity ratio. B) The ratio of sales to total equity is called the capital intensity ratio. C) The higher the capital intensity ratio, the more capital a firm needs to generate sales. D) Firms that have high capital intensive ratios are riskier than similar firms that use less fixed assets.

Q: Which of the following statements is NOT true for a firm that operates below full capacity? A) Fixed assets can vary directly with sales. B) Fixed assets will not vary directly with sales. C) Fixed assets per unit can be incrementally changed. D) All of these

Q: As sales increase, a firm needs to _____ proportionately to support the _____. A) increase the level of fixed assets; increase the level of inventory B) increase the level of inventory; higher sales level C) increase the level of inventory; increase the level of fixed assets D) None of these

Q: Which of the following statements is NOT true about more sophisticated financial planning model? A) Only fixed costs change directly with sales. B) Working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales. C) Fixed assets do not always vary directly with sales. D) All of these

Q: Planning models that are more sophisticated than the percent of sales method have A) all variable costs change directly with sales. B) working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales. C) fixed assets that do not always vary directly with sales. D) All of these

Q: Which of the following statements is NOT true about financial planning models? A) Financial statements serve as the first major input and become the baseline to compare the projected financial statements. B) Economic forecasts and their impact on the firm's sales are also included in financial planning models. C) Investment and financing decisions are not considered as inputs in financial planning models. D) Changes in a firm's balance sheet and income statement items as a result of the growth in sales are also used in these models.

Q: Why does the value of a business change over time?

Q: What are some things to watch out for when doing multiples analysis?

Q: Explain how valuations can differ between public and private companies and between young and mature companies as well as the importance of marketability, control, and key person considerations in valuation.

Q: What difficulties are associated with valuing real assets compared to financial assets?

Q: Alfred Sautin wants to invest in Dieciring, Inc., a private company. Based on earnings multiples of similar publicly traded firms, Alfred estimates the value of the private company's stock to be $19 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 11 percent. He estimates the marketability discount for such a firm to be 14 percent. The discount for the key person, one of the founders who may leave the firm upon Alfred's control of the firm, is 16 percent. What price should he be willing to pay for these shares? (Round final answer to two decimal places.)A) $15.24 per shareB) $18.10 per shareC) $14.05 per shareD) $20.70 per share

Q: Shuman Wolf is interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, he estimates the value of the private company's stock to be $20 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 9 percent. Shuman estimates the marketability discount for such a firm to be 11 percent. The discount for the key person, one of the founders who may leave the firm upon Shuman's control of the firm, is 19 percent. What price should he be willing to pay for these shares? (Round final answer to two decimal places.)A) $16.47 per shareB) $31.45 per shareC) $15.72 per shareD) $32.94 per share

Q: You are interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, you estimate the value of the private company's stock to be $13.44 per share. You plan to acquire a majority of the shares in the company. The expected control premium is 12 percent, while the marketability discount for such a firm is 15 percent. The discount for the key person, one of the founders who may leave the firm upon your control of the firm, is 15 percent. What price should you be willing to pay for these shares? (Round final answer to two decimal places.)A) $14.92 per shareB) $16.65 per shareC) $11.80 per shareD) $10.88 per share

Q: You are valuing the equity of NewNil Corp. using the FCFE approach and have estimated that the FCFE in the next three years will grow at 8 percent rate from last year's FCFE of $2.1 million. Beginning in year 4, you expect the cash flows to increase at a constant rate of 5 percent per year for the indefinite future. The cost of equity for the firm is10 percent. What is the value of equity in this company? (Round final answer to the nearest million dollars.)A) $42 millionB) $56 millionC) $48 millionD) $6 million

Q: Phosfranc Inc. is valuing the equity of a company using the free cash flow from equity, FCFE, approach and has estimated that the FCFE in the next three years will be $6.25, $7.70, and $8.36 million respectively. Beginning in year 4, the company expects the cash flows to increase at a rate of 4 percent per year for the indefinite future. It is estimated that the cost of equity is 12 percent. What is the value of equity in this company? (Do not round intermediate computations. Round final answer to the nearest million.)A) $77 millionB) $95 millionC) $109 millionD) $60 million

Q: You are using the FCFF approach to value a business. The estimated FCFF for next year will be $13.6 million, and it will increase at a rate of 6 percent for each of the following five years. After that point, the FCFF will increase at a rate of 3 percent forever. If the WACC for this firm is 8 percent, what is it worth? (Round final answer to the nearest million.)A) $301 millionB) $354 millionC) $241 millionD) $144 million

Q: Simpltar Co. is expected to grow rapidly in the next three years and then have no growth for the foreseeable future. The firm expects free cash flows of $9.1 million, $11.4 million, and $17.7 million over the next three years, and thereafter its cash flows will stay constant. The company has no nonoperating assets. If the appropriate WACC is 12 percent and debt of 44.5 million, what is the equity value of this business? (Round final answer to the nearest million.)A) $135 millionB) $105 millionC) $45 millionD) $90 million

Q: SymbyrecPhonic, an electronics manufacturer, is expected to grow rapidly in the next five years and then have a stable growth rate for the foreseeable future. The firm expects free cash flows of $262.5 million next year. These cash flows are expected to grow at a 30 percent rate over the following four years, and thereafter its cash flows will grow at a steady rate of 6 percent per annum. The company has nonoperating assets (NOA) of $31 million in the form of cash. If the appropriate WACC is 9 percent, what is the enterprise value of this business? (Do not round intermediate computations. Round final answer to the nearest million.)A) $26,490 millionB) $22,222 millionC) $19,014 millionD) $22,191 million

Q: ProtoSeis Corp. is expected to grow rapidly in the next four years and then have a zero growth rate for the foreseeable future. The firm expects free cash flows of $42.5 million, $64.3 million, $77.1 million and $92 million over the next four years, and thereafter its cash flows will stay constant. The company has cash to the tune of $23.4 million. If the appropriate WACC is 10 percent, what is the enterprise value of this business? (Do not round intermediate computations. Round final answer to the nearest million.)A) $628 millionB) $864 millionC) $811 millionD) $818 million

Q: Factrack Inc., a biotech firm, is expected to grow rapidly in the next three years and then have a level growth rate for the foreseeable future. The firm expects free cash flows of $342.5 million, $512.3 million, and $750 million over the next three years, and thereafter its cash flows will grow at a steady rate of 8 percent per annum. The company has no nonoperating assets (NOA). If the appropriate WACC is 11.25 percent, what is the enterprise value of this business? (Round to the nearest million.)A) $19,367 millionB) $18,101 millionC) $26,190 millionD) $24,923 million

Q: Cervil had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Cervil has an enterprise value/EBITDA multiple of 5.40. What is the value of Cervil's debt? (Round to the nearest million dollars.) A) $121 million B) $165 million C) $97 million D) $59 million

Q: Cervil had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Cervil has an enterprise value/EBITDA multiple of 5.40. What is the enterprise value of Cervil? (Round to the nearest million dollars.)A) $1,334 millionB) $453 millionC) $1,787 millionD) $1,315 million

Q: FifeSiete. has debt of $230 million and generated a net income of $121 million in the last fiscal year. In attempting to determine the total value of the firm, an investor identified a similar firm in Neuncon, Inc., an all-equity firm. This firm had 150 million shares outstanding, a share price of $14.25, and net income of $182 million. What is the total value of FifeSiete? (Round to the nearest million dollars.)A) $1,421 millionB) $1,651 millionC) $1,191 millionD) $1,715 million

Q: Foursonic Labs has cash of $26,000, receivables of $85,000, and inventory of $118,000. In addition, the firm has property, plant, and equipment of $165,000. Management has also told you that you can reasonably expect to collect 89 percent of the receivables, that the inventory could be sold to realize 85 percent of its book value, and that the sale of the property, plant, and equipment would yield $125,000. What is the liquidation value of this company? (Round to the nearest dollar.)A) $201,950B) $229,000C) $394,000D) $326,950

Q: Settetocol, Inc., has cash of $12,000, receivables of $35,000, and inventory of $28,000. In addition, the firm has fixed assets of $120,000. Management has also told you that you can reasonably expect to collect 93 percent of the receivables, that the inventory could be sold to realize 84 percent of its book value, and that the sale of the property, plant, and equipment would yield $94,000. What is the liquidation value of this company? (Round to the nearest dollar.)A) $162,070B) $139,695C) $174,866D) $138,695

Q: FifeSiete Corp. wants to break even at 15,000 units on its only product. Its unit variable cost is $55, and its fixed cost is $750,000. What should be the company's unit selling price?A) $85B) $92C) $105D) $78

Q: Neucon company needs to sell 6,000 circuit breakers to break even. Its unit variable cost is $441, and its unit selling price is $800. What is the fixed cost of this company?A) $1,497,250B) $2,154,000C) $2,855,250D) $4,652,500

Q: WarrenSoft makes period pieces. The firm has total fixed costs of $500,000. The average piece is sold at a price of $2,500 and involves variable costs of $1,800 per unit. What is the break-even point for this firm? (Round to nearest whole unit.)A) 714 piecesB) 928 piecesC) 617 piecesD) 738 pieces

Q: Atamonymakes circuit boards and markets them to electronic goods manufacturers. The firm has nonsalary fixed costs of $112,000 and salary costs of $64,250. Each circuit board is sold at a price of $69 and involves variable costs of $46 per unit. What is the break-even point for Atamony? (Round to nearest whole unit.)A) 5,105 circuit boardsB) 7,663 circuit boardsC) 6,237 circuit boardsD) 2,714 circuit boards

Q: Sonicmony Soft, makes designer gold bracelets. Its annual costs include shop rent of $15,000, salaries for two jewelers of $125,000, design software costs of $12,000, and other overhead costs of $15,000. An average bracelet is priced at $6,500. It costs $2,200 in raw material, $1,500 in labor, and $400 in other expenses. What is the minimum number of bracelets that need to be sold to earn a profit? (Round to nearest whole unit.)A) 18 braceletsB) 47 braceletsC) 70 braceletsD) 14 bracelets

Q: Important issues that one must consider in valuing young private firms include: A) whether key people remain in the firm, the amount of dividends that one may receive in the coming years, and whether a controlling ownership interest or a minority interest is being valued. B) the difficulty in valuing young, rapidly growing companies in contrast to mature, stable companies, the amount of dividends that one may receive in the coming years, and whether a controlling ownership interest or a minority interest is being valued. C) the difficulty in valuing young, rapidly growing companies in contrast to mature, stable companies, whether key people remain in the firm, and whether a controlling ownership interest or a minority interest is being valued. D) whether the key people remain in the firm, the pretax operating cash flows generated by the firm in the coming years, and whether a controlling ownership interest or a minority interest is being valued.

Q: In contrast to the FCFE approach, the dividend discount model (DDM) approach values: A) cash flows that are available for distribution to stockholders. B) the stream of cash flows that stockholders expect to receive through dividend payments. C) the stream of cash flows that stockholders expect to receive through bonus issue. D) the stream of cash flows that stockholders expect to receive through stock repurchase.

Q: The three specific cash flows associated that are included in the free cash flow to equity (FCFE) approach are: A) the interest expense on existing debt, the repayment of debt principal, and the proceeds from new debt issues. B) the interest expense on existing term debt, the repayment of debt principal, and the proceeds from new equity issues. C) the interest expense on existing debt, the repayment of debt principal, and the payment of dividends. D) the interest expense on existing debt, the repayment of debt principal, and the payment of dividends.

Q: The free cash flow to equity (FCFE) approach uses only the portion of the cash flows that are available: A) for distribution to bondholders. B) for distribution to bondholders and stockholders. C) for distribution to stockholders. D) for distribution to board of directors.

Q: In the free cash flow from the firm (FCFF) approach, the total value of the firm, VF, is computed as the present value of the FCFF: A) discounted by the firm's cost of equity. B) discounted by the firm's WACC. C) discounted by the firm's cost of debt. D) discounted by the inflation rate prevailing in the economy.

Q: The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses: A) are subtracted in the calculation of free cash flow from the firm (FCFF). B) are added in the calculation of FCFF. C) are not a factor in the calculation of FCFF. D) are added to the value of equity claims.

Q: Which of the following statements about the free cash flow from the firm (FCFF) approach is true? A) The present value of these cash flows exceeds the total value of the firm, or its enterprise value. B) We include the cash necessary to pay short-term liabilities that do not have interest charges associated with them, such as accounts payable and accrued expenses. C) The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses, are added in the calculation of FCFF. D) The total value of the firm, VF, is computed as the present value of the FCFF, discounted by the firm's weighted average cost of capital, WACC.

Q: The transaction approach is difficult to use because: A) transactions data are typically as reliable as the data available for multiples analysis, especially when they are associated with a private firm. B) transactions involving the purchase or sale of an entire business in an industry tend to occur frequently and hence the amount of data is immense. C) the terms of the transactions can be easy to assess. D) the terms of the transactions can be difficult to assess.

Q: When using the multiples analysis approach to valuing a business, one must be aware: A) of the presence of a marketability premium that can be sizable. B) of the adjusted book value of a business which is the cost of duplicating the assets of the business in their present form as of the valuation date. C) of the stock value of similar companies whose shares are not publicly traded. D) of the presence of a marketability discount that can be sizable.

Q: The adjusted book value approach involves: A) restating the value of the individual assets in a business to reflect their historical costs. B) valuing individual assets within a business when they are being insured, but it is rarely used to value an entire business. C) the cost of duplicating the assets of the business in their present form as of the valuation date. D) valuing all tangible and intangible assets.

Q: Which of the following statements is true of replacement cost approach? A) Replacement cost is an income-based valuation approach. B) This approach should include only tangible assets, whether they are actually included on the accounting balance sheet or not. C) The replacement cost of a business is the cost of duplicating the assets of the business in their present form as of the valuation date. D) The replacement cost valuation approach is generally used to value the whole of assets within a business when they are being insured.