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:

Fuzzy Button Clothing Company has no debt in its capital structure and has $100 million in assets. Its sales revenues last year were $30 million with a net income of $5 million. The company distributed $1.95 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.5.13%

b.7.47%

c. 1.99%

d. 3.15%

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

- The firm’s total asset turnover ratio remains constant.

- The firm must issue the same number of new common shares that it issued last year.

- The firm uses all equity and no debt financing.

- The firm maintains a constant ratio of assets to equity.

Answer 1

Calculation of self supporting growth rate is as below-

Assumptions of Self-Supporting growth rate are-

- The firm must issue the same number of new common shares that it issued last year.

- The firm uses all equity and no debt financing.