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    Calculate the need for external financing

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    Is this statement correct: 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. Please justify your argument.

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    Solution Preview

    Yes the statement is correct.

    We could write the need for external financing as
    External Financing Needed = Increase in Assets - Increase in spontaneous liabilities - increase in retained earnings

    The firm has positive net worth and that implies that assets are higher than liabilities. If all ratios are held constant, then it ...

    Solution Summary

    The solution explains the factors on which the requirements of external financing depend.