Chapter 18

What is the retention ratio for TESBA if the firm's return on equity (ROE) is 12% and the firm's dividend payout ratio is 45%?

• 55%

• 45%

• 40%

• 50%

The first step in forecasting long-term financial needs is to __________.

• Prepare an income statement

• Assess short-term investment opportunities

• Construct a sales forecast

• Develop a marketing strategy

If sales fall, then the percent of sales method may __________ profits if fixed costs do not decline by the same amount as the sales decline.

• Underestimate

• Accurately reflect

• Minimize

• Overstate

The percent of sales forecasting method assumes that costs:

• Remain a fixed percentage of sales.

• Are independent of sales

• Increase proportionally with sales

• Decrease proportionally with sales

A firm anticipates that growth projections for the next five years will require another $100 million in funds. If the firm can generate $40 million internally, it will need to raise $60 million in __________.

• Operating income

• Retained earnings

• Net new financing

• External debt

What is the sustainable growth rate for TESBA if the firm's return on equity (ROE) is 12% and the firm's dividend payout ratio is 45%?

• 9.5%

• 6.6%

• 8.4%

• 12.3%

A firm has $4 million in total assets and $2.2 million in equity. How much of its $500,000 capital budget should be debt-financed to retain the same debt-equity ratio?

• $185,000

• $275,000

• $315,000

• $225,000

How to get forecast earnings?

• Average Sales Price = Market Size x Market Share

• Sales = Market Size x Market Share x Average Sales Price

• Sales = Market Share x Production Volume

• Sales = Market Size x Market Share x COGS

When a company is growing faster than it can finance internally, any distributions to shareholders will cause it to seek greater additional financing.

• TRUE

• FALSE

When we forecast L + E > A, additional financing is needed.

• TRUE

• FALSE