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:
A) accounts payable.
B) long-term debt.
C) fixed assets.
D) retained earnings.
E) common stock.

Question

Quizplus · Accepted Answer

The firm will meet its positive external financing need with long-term debt since it does not wish to obtain additional equity financing and the dividend payout ratio is constant, limiting the use of retained earnings.

A Firm Is Currently Operating at Full Capacity