Gerentology Associates, a highly profitable company, is considering 2 growth sta

Question

Gerentology Associates, a highly profitable company, is considering 2 growth stategies, one that will achieve sales growth of 20% in one year, and the other that will achieve 20% growth in sales but over a 4 year time frame. Assuming they use the percentage of sales method, which of the following statements is true?

A-Discretionary financing needed will be much greater for the 4 year growth strategy.

B-Discretionary financing needed could be much less for the 4 year growth strategy due to retained earnings.

C-Discretionary financing needed could be much greater for the slow growth strategy because interest charges will accumulate on the companys debt.

D-The asset balances at the end of 4 years for strategy 2 will be much greater than the asset balances required at the end of year one for strategy one.

Explanation / Answer

DISCRETIONARY FINANCING NEEDED COULD BE MUCH LESS FOR THE 4 YEAR GROWTH STRATEGY DUE TO RETAINED EARNINGS. TRUE STATEMENT BECAUSE AS THE SALES IS DIVEDE BETWEEN FOUR YEARS THE INVESTMENT IS ALSO WILL BE LESS PER YEAR AND AFTER ONE YEAR OF OPERATION THERE WILL BE RETAINNED EARNNINGS WHICH CAN BE ADJUSTED AGAINST THE OUTSIDE FINANCING NEEDS.

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