Question

5. Sustainable growth As a firm grows, it must support increases in revenue with new investments in assets. The self-supporting, or sustainable, 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 the following case of Bohemian Manufacturing Company: Bohemian Manufacturing Company has no debt in its capital structure and has $300,000,000 in assets. Its sales revenues last year were $120,000,000 with a net income of $2,000,000. The company distributed $180,000 as dividends to its shareholders last year. Given the information above, what is Bohemian Manufacturing Company's sustainable growth rate? 4.1464268% O 0.5181384% O 0.0601562% O 0.61% Which of the following are assumptions of the sustainable (self-supporting) growth model? Check all that apply. The firm pays no dividends. The firm maintains a constant ratio of liabilities to equity. The firm's total asset turnover ratio remains constant.

Answer 1

Growth rate is calculated by solving the below equation:

$g = ROE \times Retention \ ratio$

g= growth rate, ROE = Return on Equity

Net income Net income - Dividends - X- Assets Net income

$g = \times \frac{2,000,000-180,000}{300,000,000}$

Sustainable growth rate model assumes that there is no new debt or equity being issued, this is how its growth is self sustained. Therefore the liabilities to equity ratio remains constant.