Computation of maximum sustainable growth rate

Reference no: EM1310549

Assume a firm has a net income in 20×9 of $20 and it's end of year 20×8 total assets were $450. Further assume that the firm has a standing requirement to maintain a debt/equity ratio of 0.8, and that its manager are prohibited from further borrowing or stock issuance.

1. What is this firm's maximum sustainable growth rate?

2. If the firm pays $6 of the $20 net income as a dividend, and plans to maintain this pay-out ratio into the future, now what is its maximum sustainable growth rate?

3. If the firm uses $12 of the $20 net income to repurchase some of its outstanding shares, now what is its maximum sustainable growth rate?

4. If the firm takes action as described in part b and c, what should its maximum sustainable growth rate be?

Reference no: EM1310549

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