Question

A venture has a sustainable growth rate of 15% per year.  The entrepreneur wants to target a growth rate of 25%. To achieve this in a way that would not change the ratios comprising its sustainable growth rate, the entrepreneur must.

	A.	Add 10% of new equity each year.
	B.	Add 10% new debt each year.
	C.	Maintain its profitability and dividend payout ratio.
	D.	All of the above

Answer 1

Answer:- Option (C):- Maintain its profitability and dividend payout ratio

Explanation:-

• Self-supporting/Sustainable growth model means growth rate that a company can sustain without securing any additional funding which means without borrowing additional money or issuing new equity.
• It assumes that firm has a given dividend payout policy and a fixed D/E ratio and the Firm's Net Income is a constant proportion of sales. Hence, to achieve target growth rate in a way that would not change the ratios comprising its sustainable growth rate, the entrepreneur must maintain the firm's profitability and dividend payout ratio