A firm's net working capital and all of its expenses vary directly with sales. The firm is operating currently at 96 percent of capacity. The firm wants no additional external financing of any kind.

1. Which one of the following statements related to the firm's pro forma statements for next year must be correct?

A. the firm cannot exceed its internal rate of growth.

B. The maximum rate of sales increase is 4 percent. C. The projected owners' equity will equal this year's ending equity balanceD. Total liabilities will remain constant at this year's value. E. Fixed assets must remain constant at the current level.

A. the firm cannot exceed its internal rate of growth.

Explanation:

The internal growth rate is the highest level of growth that a business can achieve without any external financing. It is the level of business operations that the business can maintain on its own, and without issuing equity to gain funding.

The firm's working capital and expenses will vary directly with sales revenue.

This is a good measure of how start-ups can survive without outside funding.

Internal growth is used by businesses to maximise output from use of their processes. For example increasing efficiency of a companie's machinery to increase output.