Suppose a firm with a positive net worth is operating its fixed assets at full capacity and its dividend payout ratio is 100%,and it wants to hold all financial ratios constant.Then,for any positive growth rate in sales,it will require external financing.

Question

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If the dividend payout ratio is 100%, then all earnings are being paid out as dividends and there will be no retained earnings to finance any growth in sales. If the firm wants to maintain its financial ratios, it will need to raise external financing in order to fund any increase in sales.

Suppose a Firm with a Positive Net Worth Is Operating