Concept Review and Critical Thinking Questions #1, 2, 3, 4, 5
Questions and Problems #1, 2, 3, 4, 21, 22
Concept Review and Critical Thinking Questions #1, 2, 3, 4, 8
Questions and Problems #1-6, 13-15, 17 1. The reason is that, ultimately, sales are the driving force behind a business. A firm’s assets, employees, and, in fact, just about every aspect of its operations and financing exist to directly or indirectly support sales. Put differently, a firm’s future need for things like capital assets, employees, inventory, and financing are determined by its future sales level. 2. Yes it is possible, although they would have to take in new debt to finance their desired growth rate of 25%. 3. This tells you that their internal growth rate is higher than sales growth of 15%, along with the sustainable growth rate also being higher than sales growth. Having a negative EFN, means that the firm does not need additional financing. If the retention ratio is increases this would mean the company is keeping more of its income and not paying out as much dividends. Therefore, the company’s EFN would be even more negative. Vice versa, if the retention ratio was decreased. If the firm pays out all of its earnings in dividends then the retention ratio would go down which would therefore increase EFN, meaning the firm would need additional financing. 4. If the sales growth was 20% and the firm has a negative projected EFN, this would tell me that the firm’s sustainable growth rate is higher than the firm’s sales growth rate because having a negative EFN implies the firm does not require additional financing. 5. If the firm’s product was less popular, then their sales growth would not be as strong. Therefore the firm would eventually need additional financing to keep it operations in tact. Which means their EFN would most likely be positive.