Chapter 04 - Managing Growth
1. Which one of the following will increase the sustainable rate of growth a corporation can achieve?
A. avoidance of external equity financing
B. increase in corporate tax rates
C. reduction in the retention ratio
D. decrease in the dividend payout ratio
E. decrease in sales given a positive profit margin
F. None of the above.
2. Which of these ratios are the determinants of a firm's sustainable growth rate?
I. Assets-to-equity ratio
II. Profit margin
III. Retention ratio
IV. Asset turnover ratio
A. I and III only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
F. None of the above.
3. The retention ratio is:
A. equal to net income divided by the change in total equity.
B. the percentage of net income available to the firm to fund future growth.
C. equal to one minus the asset turnover ratio.
D. the change in retained earnings divided by the dividends paid.
E. the dollar increase in net income divided by the dollar increase in sales.
F. None of the above.
4. Which of the following statements is true?
A. Rapid growth spurs increases in market share and profits and thus, is always a blessing.
B. Firms that grow rapidly only very rarely encounter financial problems.
C. The cash flows generated in a given time period are equal to the profits reported.
D. Profits provide assurance that cash flow will be sufficient to maintain solvency.
E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow
broke".
F. None of the above.
5. Which one of the following correctly defines the retention ratio?
A. one plus the dividend payout ratio
B. additions to retained earnings divided by net income
C. additions to retained earnings divided by dividends paid
D. net income minus additions to retained earnings
E. net income minus cash dividends
F. None of the above.
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© 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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Chapter 04 - Managing Growth
6. Which one of the following policies most directly affects the projection of the retained earnings balance to be
used on a pro forma statement?
A. net working capital policy
B. capital structure policy
C. dividend policy
D. capital budgeting policy
E. capacity utilization policy
F. None of the above.
7. Which of the following questions are appropriate to address upon conducting sustainable growth analysis and
the financial planning process?
I. Should the firm merge with a competitor?
II. Should additional equity be sold?
III. Should a particular division be sold?
IV. Should a new product be introduced?
A. I, II, and III only
B. I, II, and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
F. None of the above.
8. The sustainable growth rate of a firm is best described as the:
A. minimum growth rate achievable assuming a 100 percent retention ratio.
B. minimum growth rate achievable if the firm maintains a constant equity multiplier.
C. maximum growth rate achievable excluding external financing of any kind.
D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debtequity ratio.
E. maximum growth rate achievable with unlimited debt financing.
F. None of the above.
9. The sustainable growth rate:
A. assumes there is no external financing of any kind.
B. assumes no additional long-term debt is available.
C. assumes the debt-equity ratio is constant.
D. assumes the debt-equity ratio is 1.0.
E. assumes all income is retained by the firm.
F. None of the above.
10. Which of the following can affect a firm's sustainable rate of growth?
I. Asset turnover ratio
II. Profit margin
III. Dividend policy
IV. Financial leverage
A. III only
B. I and III only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
F. None of the above.
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© 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 04 - Managing Growth
11. Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30
percent dividend payout ratio. What is the projected increase in retained earnings?
A. $14,700
B. $17,500
C. $18,300
D. $20,600
E. $21,000
F. None of the above.
12. Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is
1.6 and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is the sustainable rate of
growth?
A. 1.91 percent
B. 6.12 percent
C. 10.83 percent
D. 11.26 percent
E. 12.74 percent
F. None of the above.
13. A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. The asset turnover
ratio is 0.85 and the assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is the profit margin?
A. 3.79 percent
B. 5.69 percent
C. 6.75 percent
D. 10.13 percent
E. 18.24 percent
14. Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had
total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000
and dividends were $44,640. What is the sustainable growth rate?
A. 15.32 percent
B. 15.79 percent
C. 17.78 percent
D. 18.01 percent
E. 18.24 percent
The following table presents financial information for Boss Stores, Inc., a retail chain store in the U.S.
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Chapter 04 - Managing Growth
15. Use the information from Boss's annual financial statements. What is the retention ratio for 2009?
A. 0.32
B. 0.68
C. 0.97
D. 1.00
E. None of the above.
16. Use the information from Boss's annual financial statements. What is the actual sales growth rate for 2010?
A. - 17.6%
B. - 7.9%
C. 8.51%
D. 21.4%
E. None of the above.
17. Use the above information from Boss's annual financial statements. What is the sustainable sales growth rate
for 2010?
A. - 17.6%
B. - 7.9%
C. 9.07%
D. 10.27%
E. 12.23%
F. 21.4%
18. Use the information from Boss's annual financial statements. What is the difference between the sustainable
growth and actual growth rates for 2011?
A. - 11.40%
B. - 7.09%
C. -3.04%
D. 5.47%
E. 13.98%
F. 21.40%
19. Which of the following actions might a firm take if its actual sales growth exceeds its sustainable rate of
growth?
I. Increase prices
II. Decrease financial leverage
III. Decrease dividends
IV. Prune away less marginal products
A. I and II only
B. I and III only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV
F. None of the above.
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© 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.