Question

A firm has a positive net worth and is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, and the company wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing. Question 6 options:

a) True
b) False

Answer 1

True

Step-by-step explanation:

Net Worth = Total Assets - Total Liabilities

When it is positive and the company wants that all financial ratios shall remain constant, that is no change then when there is increase in sales then there will be increase in profits.

Accordingly, in case of operating at full capacity the company shall also increase external financing. As with increase in sales debtors or cash will increase, but if the external finance is increased, net worth will remain same, but if it is not increased, net worth will increase.