Which of the Following Statements Is CORRECT

question 5

Multiple Choice

Which of the following statements is CORRECT?

• A) 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.
• B) 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.
• C) 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.
• D) 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.
• E) Dividend policy does not affect the requirement for external funds based on the AFN equation.

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Definitions:

Manufacturing Overhead

All indirect costs associated with the production process, including costs related to factory operation but not directly traceable to the product, such as maintenance and utilities.

Work in Process

Inventory that is in the production process but is not yet completed.

Overapplied

A situation where the allocated amount of indirect costs exceeds the actual amount incurred.

Underapplied

A situation where the applied manufacturing overhead is less than the actual manufacturing overhead incurred, indicating that the costs have not been fully allocated.