A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume the firm:
A) is projected to grow at the internal rate of growth.
B) is projected to grow at the sustainable rate of growth.
C) currently has excess capacity.
D) is currently operating at full capacity.
E) retains all of its net income.

Question

Quizplus · Accepted Answer

When both sales and fixed assets are projected to increase by the same percentage, it implies that the firm is operating at full capacity. This is because the need to increase fixed assets (such as property, plant, and equipment) in proportion to sales suggests that the current assets are fully utilized to support the current level of sales, and any growth in sales requires a proportional increase in assets to support that growth.

A Pro Forma Statement Indicates That Both Sales and Fixed