Suppose a firm with a positive net worth is operating its fixed assets at full capacity, its dividend payout ratio is 100%, and 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

If the dividend payout ratio is 100%, then the firm is paying out all of its earnings to shareholders and does not have any funds left over for reinvestment. Therefore, any increase in sales would require additional financing to support the growth.

Suppose a Firm with a Positive Net Worth Is Operating