Growth appears as a factor in more than one financial decision. Which…

The correct answer is Option (3) → Even when higher growth is only expected, a company may create higher capacity to meet the anticipated higher demand quicker.

Option (1) A concern with a higher growth potential needs more inventory and debtors so that it can meet higher production and sales targets. — Incorrect. This is growth prospects as a factor of working capital. Inventory and debtors are current assets, so this line is about the funds for day-to-day work.

Option (2) Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. — Incorrect. This is growth opportunities as a factor of the dividend decision. Such companies keep more of their earnings for investment, so they pay smaller dividends.

Option (3) Even when higher growth is only expected, a company may create higher capacity to meet the anticipated higher demand quicker. — Correct. Higher growth needs more investment in fixed assets. Even when growth is only expected, a company may build higher capacity in advance to meet the expected demand quicker. This means larger fixed capital.

Option (4) A business that does not grow dies, but it has to grow within the financial constraints of the business. — Incorrect. This line says a business must grow within its financial limits. It speaks of growth in general and says nothing about how expected growth changes the investment in fixed assets.