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5. Sustainable growth As a firm grows, it must support increases in revenue with new investments...

5. Sustainable growth

As a firm grows, it must support increases in revenue with new investments in assets. The self-supporting, or sustainable, 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 the following case of Green Caterpillar Garden Supplies Inc.:

Green Caterpillar Garden Supplies Inc. has no debt in its capital structure and has $150,000,000 in assets. Its sales revenues last year were $45,000,000 with a net income of $1,500,000. The company distributed $195,000 as dividends to its shareholders last year.

Given the information above, what is Green Caterpillar Garden Supplies Inc.’s sustainable growth rate?

4.7609329%

0.88%

2.1193124%

0.1300402%

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

The firm’s total asset turnover ratio remains constant.

The firm uses all equity and no debt financing.

The firm pays out a constant proportion of its earnings as dividends.

The firm will not issue any new common stock next year.

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