Ambersome Inc. has decided against borrowing and to have all its assets financed by equity. Furthermore, it intends to keep its payout ratio at 40 percent. Its assets turnover ratio is 0.9, its profit margin (defined as earnings before interest and tax divided by sales) is 8 percent, and profits are taxed at 40 percent. The firm’s target growth rate in sales is 5 percent.

a. Is the target growth rate consistent with the firm’s financing policy?

b. If not, how much does it need to increase the assets turnover ratio or profit margin to meet the target growth rate?

c. Suppose the firm can borrow at 10 percent. Would borrowing help it meet the target growth rate?