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