If a firm bases its growth projection on the rate of sustainable growth, and shows positive net income, then the:
A)fixed assets will have to increase at the same rate, regardless of the current capacity level.
B)number of common shares outstanding will increase at the same rate of growth.
C)debt-equity ratio will have to increase.
D)debt-equity ratio will remain constant while retained earnings increase.
E)fixed assets, debt-equity ratio, and number of common shares outstanding will all increase.

Question

Quizplus · Accepted Answer

If a firm bases its growth projection on the rate of sustainable growth, it means that it aims to grow at a rate that can be sustained without increasing its debt-equity ratio. If the firm shows positive net income, it can use this to finance growth through retained earnings rather than increasing debt-equity ratio. Therefore, the debt-equity ratio will remain constant while retained earnings increase. The increase in fixed assets and number of common shares outstanding may or may not happen, depending on the individual circumstances of the firm.

If a Firm Bases Its Growth Projection on the Rate