Question

Briefly explain, when a company’s compound sales growth slowed to half of its present rate, what would be the likely effect upon external financing needs? What is the desired effect upon inventory if such a change occurs?

Answer 1

When the compounded sales growth slows to half of its original, the current assets and the spontaneous liabilities also will decrease with the slowed growth. The net revenues, net income and retained earnings will also show decreased amounts.

The fixed assets will have to reduced since the same will not be fully utilized and hence the external financing needs will be negative meaning the the firm will have to repay some of its debt and also reduce stock equity to adhere with slowed growth and lower expectations.