A firm's profit margin is 5 percent, its debt/assets ratio is 56 percent, and its dividend payout ratio is 40 percent.

If the firm is operating at less than full capacity.

Then sales could increase to some extent without the need for external funds, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require external financing.

Would this be True or False and why?

Question

Business

Norah Shaw

16 April, 00:41

A firm's profit margin is 5 percent, its debt/assets ratio is 56 percent, and its dividend payout ratio is 40 percent.

If the firm is operating at less than full capacity.

Then sales could increase to some extent without the need for external funds, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require external financing.

Would this be True or False and why?

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Answers (1)

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Bosco · Answer 1

The given statement is FALSE.

Explanation:

It will only be till sustainable growth rate that the firm will not require external financing. The debt / ratio demands resources to sustain the operation, which are not powered by the profit margin.