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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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Assume that an average firm in the office supply business has a 6% profit margin, a 40% total liabilities/assets ratio, a total assets turnover of 2 times, and a dividend payout ratio of 40%. Is it true that if such a firm is to have any sales growth (g > 0), it will be forced to borrow or to sell common stock (that is, it will need some nonspontaneous external capital even if g is very small)? Explain.

Summary Introduction

To explain: Whether a firm will be forced to borrow or to sell common stock, if a firm is to have any sales growth.

Introduction:

Additional fund needed:

Additional fund needed is also known as external financing needed. It is the state in which a company needed finance to increase its operation. Additional fund needed is a method in which companies raise the funds through external resources to increase its assets, which would increase the sales revenue of the company.

However, according to additional fund needed method, companies do not change its financial ratio. Liabilities and retained earnings spontaneously increase with the increase in sales and assets.

Explanation
  • Every firm wants to increase its sales growth because sales growth will automatically increase the profit margin.
  • A firm wants to increase its sales growth, and not the expenses. Usually, the firm will not increase its sales growth to reduce its profit.
  • A firm has no necessity to borrow external funds at the low growth rate, as firm does not want to increase its assets at the low sales growth rate...

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