A Firm with a 30% Total Debt Ratio, Total Assets

question 22

Essay

A firm with a 30% total debt ratio, total assets of $10 million, and an ROE of 14% has been paying out 60% of earnings to shareholders in the form of dividends. Sales are expected to increase by 10% this year, a faster growth rate than usual. Will external funding be required under these conditions? Will the debt-equity ratio remain constant?

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Definitions:

Insurance Market

The marketplace where individuals or entities can purchase insurance products to transfer risk from themselves to an insurance provider.

Adverse Selection

A situation in which one party in a transaction has more or better information than the other, leading to an imbalance that can result in market inefficiency or failure.

Insurance Premium

The amount of money an individual or organization pays for an insurance policy, providing coverage against specific risks over a defined period.

Expected Loss

a calculation used in finance and insurance to estimate the average financial loss or cost associated with an investment or insurance policy over a period.