Which of the following statements is CORRECT?
A) If a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's AFN to be negative.
B) If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual AFN must, mathematically, exceed the previously calculated AFN.
C) Higher sales usually require higher asset levels, and this leads to what we call AFN.However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
D) Dividend policy does not affect the requirement for external funds based on the AFN equation.
E) The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds.In other words, it is the growth rate at which the firm's AFN equals zero.

Question

Quizplus · Accepted Answer

The sustainable growth rate is indeed the maximum growth rate a firm can achieve without needing to secure external financing, assuming it maintains a constant dividend payout ratio, business operations efficiency, and financial policy. This means the firm can grow at this rate with its internally generated funds (retained earnings), leading to an AFN (Additional Funds Needed) of zero.

Which of the Following Statements Is CORRECT