Two firms with the same capital intensity ratios were generating the same sales. However, one firm was operating below capacity. If the two firms expect the same growth in sales in the next period, it is more likely that the firm operating at full capacity will need additional funds, other things held constant.

Question

Quizplus · Accepted Answer

The firm operating at full capacity will need additional funds to expand its production capacity in order to meet the expected growth in sales. The firm operating below capacity can meet the expected growth in sales by using its existing idle capacity, and therefore may not need additional funds.

Two Firms with the Same Capital Intensity Ratios Were Generating