Question

As a firm grows, it must support increases in revenue with new investments in assets. The self-supporting growth model helps a firm assess how rapidly it can grow, while maintaining a balance between its cash outflows (increases in noncash assets) and inflows (funds resulting from increases in liabilities or equity).

Consider this case:

Green Caterpillar Garden Supplies Inc. has no debt in its capital structure and has $300 million in assets. Its sales revenues last year were $180 million with a net income of $5 million. The company distributed $1.00 million as dividends to its shareholders last year.

What is the firm’s self-supporting, growth rate? (Note: Do not round your intermediate calculations.)

a. 0.38%

b. 1.35%

c. 0.33%

d. 2.04%

Which of the following are assumptions of the self-supporting growth model? Check all that apply.

a. Common stock is the firm’s only form of equity.

b. The firm uses all equity and no debt financing.

c. The firm maintains a constant ratio of liabilities to equity.

d. The firm maintains a constant net profit margin.

Answer 1

Calculation is given in the below attached images

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