Why is the effect on a firm's internal growth rate for a firm that is funded by both debt and equity indeterminate? Since we know that at 20% growth rate, there is a negative EFN, it suggests that a firm has excess cash to finance its growth beyond 20% internally. Thus, shouldn't the internal growth rate be unambiguously more than 20%?

 Do you know, with certainty, if the internal growth rate is greater than or less than 20 percent? Why? (Qn 4CTQ)

 

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EFN and Growth Rates [LO2, 3] Broslofski 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 firm's sustainable growth rate? Do you know, with certainty, if the internal growth rate is greater than or less than 20 percent? Why? What happens to the projected EFN if the retention ratio is increased? What if the retention ratio is decreased? What if the retention ratio is zero? Use the following information to answer the next six questions: A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit. and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expanded capacity: but it still could not keep up with demand. Equipment failed from overuse and quality suffered. Working capital was drained to expand production, and, at the same time, payments from customers were often delayed until the product was shipped. Unable to deliver on orders, the company became so strapped for cash that employee paychecks began to bounce. Finally, out of cash, the company ceased operations entirely three years later. EFN and Growth Rates [LO2, 3] Broslofski 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 firm's sustainable growth rate? Do you know, with certainty, if the internal growth rate is greater than or less than 20 percent? Why? What happens to the projected EFN if the retention ratio is increased? What if the retention ratio is decreased? What if the retention ratio is zero? Use the following information to answer the next six questions: A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit. and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expanded capacity: but it still could not keep up with demand. Equipment failed from overuse and quality suffered. Working capital was drained to expand production, and, at the same time, payments from customers were often delayed until the product was shipped. Unable to deliver on orders, the company became so strapped for cash that employee paychecks began to bounce. Finally, out of cash, the company ceased operations entirely three years later.

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The sustainable growth rate is greater than 20 because at a 20 growth rate the negative E... View the full answer