Reference no: EM132506259

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 year were $120 million with a net income of $5 million. The company distributed $1.80 million as dividends to its shareholders last year.

Question 1. What is the firm's self-supporting, growth rate? (Note: Do not round your intermediate calculations.)

Option 1: 1.08%

Option 2: 0.71%

Option 3: 2.32%

Option 4: 0.60%

Question 2. Which of the following are assumptions of the self-supporting growth model? Check all that apply.

Option 1: The firm maintains a constant ratio of liabilities to equity.

Option 2: The firm pays no dividends.

Option 3: The firm's liabilities and equity must increase at the same rate.

Option 4: The firm maintains a constant net profit margin.