Question

1) If a firm grows faster than its sustainable growth rate, is that growth value decreasing?

Explain

NOTE: This question has two parts, first: is the rate value decreasing, and second

explain your answer.

2) Medtronic firm has $68,000,000 in equity and $60,000,000 in debt

and forecast $[23,000,000] in net income for the year. It currently pays

dividends equal to 16% of its net income.

a. What would their internal growth rate be?

NOTE: Answer in percentage. If your answer is 0.0405, then answer 4.05.

b. What would their sustainable growth rate be?

NOTE: Answer in percentage. If your answer is 0.0405, then answer 4.05.

Answer 1

Q-1)

If the firm is growing faster than its sustainable growth rate that means the firm is using external funds to grow. The growth rate in that case would be higher but the rate of increase of growth would slowly be decreasing and reach to its sustainable growth rate in the long term. Lets say a company grows 20% for first 5 years then 15 % next 3 years and then reach 5% sustainable growth rate. Here the growth rate is higher than the sustainable growth rate but it is decreasing gradually.