If a non-dividend paying firm bases its growth assumptions on the sustainable ra

Question

If a non-dividend paying firm bases its growth assumptions on the sustainable rate of growth, and shows positive net income, then the pro forma statement must reflect:

a. an increase in fixed assets irrespective of the firm's current operating capacity.

b. an increase in both sales and the debt-equity ratio.

c. both an increase in the total asset turnover and in the equity multiplier.

d. a constant debt-equity ratio and an increase in retained earnings.

e. increases in fixed assets, the debt-equity ratio, and the number of shares outstanding.

Explanation / Answer

If a non-dividend paying firm bases its growth assumptions on the sustainable rate of growth, and shows positive net income, then the pro forma statement must reflect a constant debt-equity ratio and an increase in retained earnings.

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