Which of the following statement is correct if a ﬁrm believes its costs and assets grow at the same rate as sales, the dividend payout ratio is ﬁxed, no new equity is possible, and the current debt-
Equity ratio is optimal?

Question

Quizplus · Accepted Answer

If a firm believes its costs and assets grow at the same rate as sales, the dividend payout ratio is fixed, no new equity is possible, and the current debt-Equity ratio is optimal, then the sustainable growth rate will give the maximum rate at which sales can grow. This is because it assumes that all new asset requirements are financed by retained earnings and existing debt, and no new equity is issued. Option B is incorrect because the firm may still need to finance its growth through debt even if the debt-equity ratio is optimal. Option C is incorrect because asset growth can also come from depreciation, investment in new assets using retained earnings, and debt financing. Option D is incorrect because paying out all net income as dividends will limit the amount of funds available for growth, not increase sales. Option E is incorrect because the current ratio, which is the ratio of current assets to current liabilities, is unrelated to the firm's ability to grow sales.

Which of the Following Statement Is Correct If a ﬁRm