Question

A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:

Answer 1

Debt Financing.

Step-by-step explanation:

There are two broad ways through which a firm can meet its financing needs.

1. Equity Financing: In this method, a firm raise capital by issuing stocks.

2. Debt Financing: In this method, a firm raise capital by issuing bonds or commercial paper, or taking loan, etc.

Since the company does not want to obtain any additional equity financing, it is left with the option of debt financing.