If a Firm Bases Its Growth Projection on the Rate

question 86

Multiple Choice

If a firm bases its growth projection on the rate of sustainable growth,and shows positive net income,then the:

• A) fixed assets will have to increase at the same rate, regardless of the current capacity level.
• B) number of common shares outstanding will increase at the same rate of growth.
• C) debt-equity ratio will have to increase.
• D) debt-equity ratio will remain constant while retained earnings increase.
• E) fixed assets, debt-equity ratio, and number of common shares outstanding will all increasE.

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Definitions:

Operating Leverage

Operating leverage refers to the degree to which a company or project can increase operating income by increasing revenue.

Total Leverage

The combination of operating leverage (affecting operating income) and financial leverage (affecting net income), indicating total risk.

Financial Leverage

The use of borrowed funds to finance the acquisition of assets, with the expectation that the profits made will be greater than the interest payable.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from revenues.