Question
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
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:
Fuzzy Button Clothing Company has no debt in its capital structure and has $100 million in assets. Its sales revenues last year were $30 million with a net income of $5 million. The company distributed $1.95 million as dividends to its shareholders last year.
What is the firms self-supporting, growth rate? (Note: Do not round your intermediate calculations.)
a.5.13%
b.7.47%
c. 1.99%
d. 3.15%
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 must issue the same number of new common shares that it issued last year.
- The firm uses all equity and no debt financing.
- The firm maintains a constant ratio of assets to equity.
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