Ch $12$: Assignment $-$ Corporate Valuation and Financial Planning

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Sustainable growth

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:

Bohemian Manufacturing Company has no debt in its capital structure and has $$300$ million in assets. Its sales revenues last yeare

$$120$ million with a net income of $$5$ million. The company distributed $$1\mathrm{.}80$ million as dividends to its shareholders last year.

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

$0\mathrm{.}60\%$

$1\mathrm{.}08\%$

$2\mathrm{.}32\%$

$0\mathrm{.}71\%$

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's liabilities and equity must increase at the same rate.

The firm pays no dividends.

The firm's total asset turnover ratio remains constant.