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:

Green Caterpillar Garden Supplies Inc. has no debt in its capital structure and has $150 million in assets. Its sales revenues last year were $75 million with a net income of $5 million. The company distributed $1.60 million as dividends to its shareholders last year.

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

2.32%

1.08%

4.60%

1.00%

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

The firms total asset turnover ratio remains constant.

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

The firms liabilities and equity must increase at the same rate.

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