Question

4. Sustainable growth

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 $300 million in assets. Its sales revenues last year were $150 million with a net income of $10 million. The company distributed $1.05 million as dividends to its shareholders last year.

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

3.08%

0.35%

1.36%

3.82%

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

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

The firm maintains a constant ratio of assets to equity.

The firm maintains a constant net profit margin.

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

Answer 1

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