Which of the following statements is CORRECT?
A) if a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's afn to be negative.
B) if a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual afn must, mathematically, exceed the previously calculated afn.
C) higher sales usually require higher asset levels, and this leads to what we call afn. however, the afn will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
D) dividend policy does not affect the requirement for external funds based on the afn equation.
E) the sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. in other words, it is the growth rate at which the firm's afn equals zero.

Question

Quizplus · Accepted Answer

The statement that is correct is E. The sustainable growth rate is defined as the maximum growth rate that a firm can achieve without having to raise external funds. This means that the AFN will be zero at the sustainable growth rate. The other statements are incorrect. A firm can have a positive asset growth rate without an increase in retained earnings, and it is possible for the actual AFN to be lower than the previously calculated AFN if sales and earnings decrease. Also, if the firm retains all its profits, the AFN will not be zero because there will still be a need to finance some growth through external funds. Finally, the dividend policy can affect the requirement for external funds based on the AFN equation, especially if the firm needs to raise funds through equity financing.

Which of the Following Statements Is CORRECT