Principles of Finance I WEEK 5: Discussion Prompt #1 - The firm\'s self-supporti

Question

Principles of Finance I WEEK 5: Discussion Prompt #1 - The firm's self-supporting growth rate is influenced by the firm's capital intensity ratio. The more assets the firm requires to achieve a certain sales level, the lower its sustainable growth rate will be. Many experts argue that it is better for an organization to grow organically or by putting the money back into the business and not taking on debt. Consider your own organization that you currently work for or have worked for in the past. What is their approach to growing the business? How would you advise your company based on what you have learned this week in terms of self-supporting growth?

Explanation / Answer

Self supporting growth rate is the maximum growth rate a firm can achieve if it doesn't have access to the external financing. Yes, it could be said that the more assets a firm require to achieve a sales level, the less it's sustainable growth be. Because without external financing, the firms have limited access to financing and hence limiting access to invest in assets which affects the firms capacity to achieve sales. Now, if the company is not getting external financing like debt it will always be having a limited resource to expansion and hence hence limited growth and profitability.

Now, taking an example of Apple, the company has that enough cash flows that they can easily invest on its own without considering external financing. But for a smaller company, growing with limited cash flows becomes difficult and hence external financing is required.

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