18. When constructing a pro forma statement net working capital generally: a. remains fixed. b. varies only when the firm is producing at full capacity. c. varies only if the firm maintains a fixed debt-equity ratio. d.varies only if the firm is producing at less than full capacity.E. varies proportionately with sales. 4-6 Chapter 004 Long-Term Financial Planning and Growth 19. When fixed assets on a pro forma statement are projected to increase at a rate equivalent to the projected rate of sales growth it can be assumed that the firm is: a. projected to grow at the internal rate of growth. b. projected to grow at the sustainable rate of growth. c. creating excess capacity. D. currently operating at full capacity. e. retaining all of its projected net income. 20. 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 EFN that need will be met by: a. accounts payable.B. long-term debt. c. fixed assets. d.retained earnings. e. common stock. 21. The composition of the liability and equity sections of a pro forma statement depend most heavily on a firm’s: a. net working capital policies. B. financing and dividend policies. c. desired level of liquidity. d.capital budgeting and working capital policies. e. level of capacity utilization and net working capital policy. 4-7 Chapter 004 Long-Term Financial Planning and Growth 22. You are comparing the current income statement of a firm along with a pro forma income statement for next year. The pro forma is based on a five percent increase in sales. The firm is currently operating at 82 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this : a. the net income shown on both statements is identical. b. the tax rate is assumed to increase at the same rate as the sales. C. the common size income statements for both years will be identical. d.next year’s increase in retained earnings will equal this year’s increase in retained earnings. e. total assets are required to also increase at a rate equal to the rate of sales growth. 23. Which of the following statements concerning pro forma financials are correct? I. The pro forma level of sales should consider macroeconomic forecasts. II. Pro forma statements should consider both the capital structure and the dividend policies of the firm. III. A pro forma balance sheet must always maintain a fixed debt-equity ratio. IV. A pro forma balance sheet must always consider the operating capacity level. a. I and II only b. III and IV only c. I III and IV only d.I II and III onlyE. I II and IV only 24. Which one of the following is required to create pro forma financial statements?A. current capacity level of operations must be known b. debt-equity ratio must be constant c. dividend amount must be constant d.all expenses must vary directly with sales e. firm must be projected to operate at full capacity 4-8 Chapter 004 Long-Term Financial Planning and Growth 25. Which of the following must you know to determine the fixed assets required to support a given level of sales? I. current amount of fixed assets II. current sales III. current level of operating capacity IV. projected growth rate of sales a. I and III only b. II and IV only c. .I II and III only d. II III and IV only e. I II III and IV 26. The plowback ratio: a. is equal to net income divided by the change in total equity. B. shows the percentage of net income available to the firm for future growth. c. plus the retention ratio must equal one hundred percent. d.is equal to the change in retained earnings divided by the dividends paid. e. represents the earnings returned to the shareholders. 27. Alpha and Beta are two firms that are equal in every way except for their dividend payout ratios. Alpha has a 30 percent payout ratio while Beta has a 40 percent payout ratio. Given this difference : a. Alpha’s profit margin next year will exceed the Beta’s profit margin. b. Alpha and Beta will continue to grow at the same rate over the next five years assuming neither firm utilizes any external financing. c. Alpha’s plowback ratio is less than Beta’s plowback ratio. D. Alpha has higher internal rate of growth than does Beta. e. Alpha has a lower sustainable rate of growth than does Beta. 4-9
