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

Question

Quizplus · Accepted Answer

If the firm is paying out 100% of its earnings as dividends, it will not have any retained earnings to reinvest in the business. Therefore, any growth in sales will require external financing to fund the necessary investments in fixed assets or working capital. This is because the firm's positive net worth will not be sufficient to finance the additional investments required for growth.

If a Firm with a Positive Net Worth Is Operating