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 Moose Industries has no debt in its capital structure and has $100 million in assets. Its sales revenues last year were $70 million with a net income of $5 million. The company distributed $1.15 million as dividends to its shareholders last year.

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

A. 4.00%

B. 6.55%

C. 1.16%

D. 0.85%

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

A. The firm maintains a constant net profit margin.

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

C. The firm uses all equity and no debt financing.

D. Common stock is the firm's only form of equity.