Question $25$

Archie Inc. creates pro forma financial statements for the upcoming year. They

assume that all variables $($i$.$e$.$ 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 an increased reliance on equity

financing.

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 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 decrease the firm's growth rate due to a reduction in the availability of

debt financing.