The external financing need:
A) will limit growth if unfunded.
B) is unaffected by the dividend payout ratio.
C) must be funded by long-term debt.
D) ignores any changes in retained earnings.
E) considers only the required increase in fixed assets.

Question

Quizplus · Accepted Answer

The external financing need refers to the amount of financing required to fund a company's growth and investments that exceed its internal cash flow generation. If this need is unfunded, it will limit the company's growth potential. Therefore, option A is the correct choice. Option B is incorrect because the dividend payout ratio can impact the external financing need by reducing the amount of retained earnings available for investment. Option C is incorrect because the external financing need can be funded by both long-term debt and equity. Option D is incorrect because changes in retained earnings can impact the external financing need. Option E is incorrect because the external financing need considers all investments and not just fixed assets.

The External Financing Need