Which of the following will increase the sustainable rate of growth for a firm?
I.Decreasing the profit margin
II.Increasing the dividend payout ratio
III.Decreasing the capital intensity ratio
IV.Increasing the target debt-equity ratio
A)I and II only
B)III and IV only
C)II and IV only
D)I, III, and IV only
E)I, II, III, and IV

Question

Quizplus · Accepted Answer

Decreasing the profit margin (Option I) will decrease the sustainable growth rate because less profit is available to reinvest in the company's growth. Increasing the dividend payout ratio (Option II) will also decrease the sustainable growth rate as more profits are distributed to shareholders instead of being reinvested in the company. Decreasing the capital intensity ratio (Option III) will increase the sustainable growth rate as it means the company requires less capital to generate revenue, thereby needing to raise less financing, making the growth more sustainable. Increasing the target debt-equity ratio (Option IV) will increase the sustainable growth rate because increasing debt will allow the company to raise funds for investment, leading to higher growth. Therefore, the correct choice is III and IV only.

Which of the Following Will Increase the Sustainable Rate of Growth