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:

Blue Elk Manufacturing has no debt in its capital structure and has $200 million in assets. Its sales revenues last year were $100 million with a net income of $5 million. The company distributed $1.35 million as dividends to its shareholders last year.

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

1.86%

0.79%

3.28%

0.68%

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

The firm maintains a constant ratio of liabilities to equity.

The firm pays no dividends.

Common stock is the firms only form of equity.

The firm maintains a constant net profit margin