6. MADA Co. maintains a positive retention ratio and keeps its debt equity ratio constant every year. When sales grow by 20 percent, the firm has a negative projected EFN. What does this tell you about the firms sustainable growth rate? Do you know, with certainty, if the internal growth rate is greater than or less than 20 percent? Why?

a.

The sustainable growth rate is greater than 20 percent, because at a 20 percent growth rate the negative EFN indicates that there is excess financing still available.

b.

The sustainable growth rate is less than 20 percent, because at a 20 percent growth If the firm is 100 percent equity financed, then the sustainable and internal growth rates are equal, and the internal growth rate would be greater than 20 percent.

c.

When the firm has some debt, the internal growth rate is always more than the sustainable growth rate,

d.

It is ambiguous whether the internal growth rate would be greater than or less than 20 percent