If a non-dividend-paying firm bases its growth assumptions on the sustainable rate of growth and shows positive net income,then the pro forma statement must reflect
A)an increase in fixed assets irrespective of the firm's current operating capacity.
B)an increase in both sales and the debt-equity ratio.
C)both an increase in the total asset turnover and in the equity multiplier.
D)a constant debt-equity ratio and an increase in retained earnings.
E)increases in fixed assets,the debt-equity ratio,and the number of shares outstanding.

Question

Quizplus · Accepted Answer

If the firm is non-dividend-paying and bases its growth assumptions on the sustainable rate of growth, then it is assumed that the firm will reinvest its earnings back into the business. Therefore, the pro forma statement must reflect an increase in retained earnings. The sustainable growth rate is based on the firm's profitability, asset utilization efficiency, and financial leverage, so an increase in total asset turnover and the equity multiplier may also be reflected in the pro forma statement. However, there is no reason to assume that there will be an increase in fixed assets or a change in the debt-equity ratio, so choices A, B, and E are not correct.

If a Non-Dividend-Paying Firm Bases Its Growth Assumptions on the Sustainable