If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income and excess capacity, then the:
A) maximum capacity level will have to increase at the same rate as sales growth.
B) total assets will have to increase at the same rate as sales growth.
C) debt-equity ratio will increase.
D) retained earnings will increase.
E) number of common shares outstanding will increase

Question

Quizplus · Accepted Answer

If the firm's pro forma sales growth is equated to the rate of sustainable growth and it has positive net income and excess capacity, it means the firm is not operating at its full potential. Therefore, as the firm grows, it can fund this growth with its retained earnings rather than issuing new shares or taking on more debt. As a result, the retained earnings will increase.

If a Firm Equates Its Pro Forma Sales Growth to the Rate