20. From reading Facegen’s financial statements, we can easily tell the firm's net working capital and...
20. From reading Facegen’s financial statements, we can easily tell the firm's net working capital and all of its expenses vary directly with sales. At the same time, the firm is currently operating at 86 percent of capacity. And, it does not want to apply external financing by issuing either stock or bonds. Facegen is paying income taxes at 21%. It has adopted a constant dividend payout ratio of 25%. Which statement given below related to the firm's pro forma financial statement of next year must be correct?
| A | Total equity will remain constant at this year's ending value. |
| B | The maximum rate of sales increase is four percent. |
| C | The firm cannot exceed its internal rate of growth. |
| D | Accounts payable will increase at the same rate as fixed assets. |
| E | Inventory will remain constant at the current level. |
Homework Answers
Answer:
| C | The firm cannot exceed its internal rate of growth. |
Explanation:
The IGR is that rate of growth which a firm can achieve without resorting to external borrowings, that is by using only retained earnings.
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