firms with identical capital intensity ratios are generating the same amount of sales However, Firm A is operating at full capacity, while Firm B is operating below capacity If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.

Question

Quizplus · Accepted Answer

Since Firm A is already operating at full capacity, any increase in sales will require additional investment in fixed assets or working capital. On the other hand, Firm B has spare capacity and can increase its sales without needing significant additional investment. Therefore, Firm A is likely to need more additional funds than Firm B to achieve the same level of growth in sales.

Firms with Identical Capital Intensity Ratios Are Generating the Same