Name five key factors that affect a firm’s external financing requirements.

Explanation

External financing requirement of a firm largely depends on the following five key factors:

Growing firms with high growth rates generally need more external capital.
Firms having high capital intensity ratio need to invest more in assets and need more external capital.
Firms having high spontaneous liabilities-to-sales ratio need less external capital due to increase in spontaneous liabilities.
Firms with a high profit margin need less external capital due to higher profits available to manage investments.
Firms with a high payout ratio need more external capital as they are paying higher dividends.

Verified Answer

Key factors that affect a firm's external financing requirement are:

Sales growth rate
Capital intensity ratio
Spontaneous liabilities-to-sales ratio
Profit margin
Payout ratio