BJ Company's net working capital and all of its expenses vary directly with sales. The firm is currently operating at 86 percent of capacity. The firm wants no additional external financing of any kind. The tax rate is 21 percent and the dividend payout ratio is fixed at 25 percent. Which statement related to next year's pro forma statements must be correct?
A) Total equity will remain constant at this year's ending value.
B) The maximum rate of sales increase is four percent.
C) The firm cannot exceed its internal rate of growth.
D) Accounts payable will increase at the same rate as fixed assets.
E) Inventory will remain constant at the current level.

Question

Quizplus · Accepted Answer

Since BJ Company wants no additional external financing of any kind, its growth is constrained by its internal rate of growth - the maximum rate at which it can grow using only retained earnings. This means that the firm cannot exceed its internal rate of growth, and therefore, statement C must be correct.

Option A cannot be determined with the given information as it depends on the change in net income and the decision to issue new shares.

Option B cannot be determined with the given information as it depends on the current level of the firm's net working capital and fixed assets.

Option D cannot be determined with the given information as accounts payable and fixed assets may not necessarily increase at the same rate.

Option E cannot be determined with the given information as the company's inventory levels may change depending on sales projections and production decisions.

BJ Company's Net Working Capital and All of Its Expenses