4. EFN and growth rates [LO 4.2, 4.3] Stone Ltd maintains a positive retention ratio and keeps its debt-to-equity ratio constant every year.

When sales grow by 20 per cent, the firm has a negative projected EFN. What does this tell you about the firm’s sustainable growth rate?

Do you know, with certainty, if the internal growth rate is greater than or less than 20 per cent? Why? What happens to the projected EFN if the retention ratio is increased? What if the retention ratio is decreased? What if the retention ratio is zero?

A small business called The Grandmother Calendar Company began selling personalised photo calendar kits. The kits were a hit and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expanded capacity; but it still could not keep up with demand. Equipment failed from overuse and quality suffered.
Working capital was drained to expand production, and, at the same time, payments from customers were often delayed until the product was shipped.
Unable to deliver on orders, the company became so strapped for cash that employee paycheques began to bounce. Finally, out of cash, the company ceased operations entirely three years later.