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

Since the firm is non-dividend-paying, it is assumed that all earnings are retained. Therefore, an increase in net income leads to an increase in retained earnings. As a result, the pro forma statement must reflect a constant debt-equity ratio and an increase in retained earnings, as indicated in option D. Options A, B, and E are not necessarily true based on the information provided. Option C is irrelevant as the total asset turnover and equity multiplier are not mentioned in the question.

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