Which of the following will increase the additional funds needed from external sources?
A) The firm's profit margin increases.
B) The firm's dividend payout ratio decreases.
C) The firm's debt ratio increases.
D) The firm becomes more capital intensive.

Question

Quizplus · Accepted Answer

When a firm becomes more capital intensive, it means the firm is increasing its investment in fixed assets relative to its total assets. This typically requires more funding, which can lead to an increase in the additional funds needed from external sources to finance these investments. Choices A, B, and C generally would not increase the need for external financing. An increase in the firm's profit margin (A) and a decrease in the firm's dividend payout ratio (B) would likely generate more internal funds, reducing the need for external financing. An increase in the firm's debt ratio (C) indicates more borrowing, which is a form of external financing, but it does not inherently increase the need for additional external funds; it's a method of meeting that need.

Which of the Following Will Increase the Additional Funds Needed