Corporate Finance 2_Quiz 1

The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its:

• rate of return on assets.

• internal rate of growth.

• rate of return on equity.

• sustainable rate of growth.

The sustainable growth rate will be equivalent to the internal growth rate when, and only when:

• a firm has no debt.

• the growth rate is positive.

• the plowback ratio is positive but less than 1.

• a firm has a debt-equity ratio equal to 1.

The sustainable growth rate:

• is normally higher than the internal growth rate.

• assumes the debt-equity ratio is variable.

• is based on receiving additional external equity financing.

• assumes the dividend payout ratio is equal to zero.

Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 35 percent. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to:

• 35 percent of the internal rate of growth.

• 65 percent of the internal rate of growth.

• the internal rate of growth.

• the sustainable rate of growth.

Financial planning models are most apt to omit:

• the changes in net working capital required for additional sales.

• the increases in costs required to increase sales.

• any change in retained earnings due to changes in the income statement.

• the timing, risk, and size of the cash flows.

JB Markets has sales of $848,600, net income of $94,000, dividends paid of $28,200, total assets of $913,600, and current liabilities of $78,900. Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm's managers project a firm growth rate of 15 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity.

• $49,535

• $68,211

• −$10,406

• $13,909

The Lumber Mill has total assets of $591,600, current liabilities of $49,700, dividends paid of $12,000, net sales of $68,400, and net income of $55,400. Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm's managers project a firm growth rate of 6 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity.

• $3,200

• −$13,490

• −$17,520

• $15,640

Deep Falls Timber has net sales of $642,100, net income of $50,800, dividends paid of $12,700, total assets of $658,000, and total equity of $444,400. What is the internal growth rate?

• 5.83 percent

• 6.24 percent

• 6.15 percent

• 5.18 percent

Narrow Falls Lumber has total assets of $913,600, total debt of $424,500, net sales of $848,600, and net income of $94,000. The tax rate is 21 percent and the dividend payout ratio is 30 percent. What is the firm's sustainable growth rate?

• 13.97 percent

• 14.46 percent

• 15.54 percent

• 12.63 percent

Which account is least apt to vary directly with sales?

• Notes payable

• Inventory

• Cost of goods sold

• Accounts payable