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Archie Inc. creates pro forma financial statements for the upcoming year. They assume that all variables ( i . e . revenue, costs, income, assets,
Archie Inc. creates pro forma financial statements for the upcoming year. They
assume that all variables ie revenue, costs, income, assets, etc. will grow by the
same percentage. Due to the assumed growth in income, debt plus equity does not
sum up to total assets because of the addition of retained earnings. To balance the
books, the CFO decided he must retire the outstanding debt. Which option is the
most correct?
The retirement of debt may decrease the firm's growth rate due to a reduction in the availability of debt
financing.
The retirement of debt may lead to an increase in return on equity ROE due to the increased rate of
growth spurred by the reduction in debt
The retirement of debt may increase the firm's growth rate due to the reduction in default risk inherent in
a lower leverage ratio.
The retirement of debt may decrease the firm's growth rate due to an increased reliance on equity
financing.
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