Which of the following will decrease the additional funds needed from external sources?
A) The firm's profit margin decreases.
B) The firm's retention ratio is increased.
C) The firm reduces its usage of trade credit.
D) None of these

Question

Quizplus · Accepted Answer

Increasing the retention ratio means that the firm is retaining more of its earnings instead of distributing them as dividends. This increases the amount of internal funds available for investment, thereby decreasing the additional funds needed from external sources. A decrease in profit margin would require the firm to finance its operations with additional external funds. Similarly, reducing usage of trade credit may lead to a decrease in the amount of current liabilities but may not necessarily affect the need for external funds.

Which of the Following Will Decrease the Additional Funds Needed