If a firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing.

Question

Quizplus · Accepted Answer

Since the firm is operating its fixed assets at full capacity, it cannot increase production without external financing. Additionally, if the dividend payout ratio is 100%, all earnings are distributed to shareholders, leaving no retained earnings for further investment in the business. Therefore, any growth in sales will require external financing to fund the necessary increase in production capacity.

If a Firm with a Positive Net Worth Is Operating