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Question
Which of the following statements is correct?
a. The first pass using the projected balance sheet method determines the financing feedback effects and determines how much in additional funds are needed. The second pass completes the cycle, identifies the full financing need, and eliminates further feedback effects.
b. Interest expense on additional new debt is the only income statement account affected by financing feedback, and dividends payable to new common stock is the only balance sheet account affected.
c. The projected balance sheet method is useful for determining additional funds needed, however, it cannot be used in evaluating dividend policy and capital structure decisions.
d. One reason a firm's managers may choose to meet additional funds needed requirements through common stock is that it involves no financing feedback effects. Since no new debt is used, interest expense will be considered fully in the first pass, the income statement will remain unchanged, and no second pass is needed.
e. If new debt and new stock are used to meet new financing needs, net income will decrease from the first pass to the second pass even though taxes decrease. In addition, if dividends are to be paid on new stock, this will further decrease the amount of retained earnings available for financing needs.
Answer
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