Question

External Financing Needed. Testaburger, Inc., uses no external financing and maintains a positive retention ratio. When...

External Financing Needed. Testaburger, Inc., uses no external financing and maintains a positive retention ratio. When sales grow by 15 percent, the firm has a negative projected EFN. What does this tell you about the firm’s internal growth rate? How about the sustainable growth rate? At this same level of sales growth, what will happen to the projected EFN if the retention ratio is increased? What if the retention ratio is decreased? What happens to the projected EFN if the firm pays out all of its earnings in the form of dividends?

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Answer #1

Answer : When the sales grow by 15% it is given that the firm has negative projected EFN therefore negative EFN shows that there is excess finacing by internal sources , So the internal Growth rate must be more than 15%

In case the internal growth rate is more then 15% , then certainily sustainable growth rate will be more than 15% as Sustainable growth rate uses external or debt finance.

If Retention ratio is increased EFN will decline .On the other hand if retention is decreased then EFN will increase due to change in internal source of financing.

In case  the firm pays out all of its earnings in the form of dividends then there will be no Internal growth rate and External Financing Need will increase tochange of total assets.

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