As a firm grows, it must support increases in revenue with new investments in as

Question

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: Green Caterpillar Garden Supplies Inc. has no debt in its capital structure and has $150 million in assets. Its sales revenues last year were $75 million with a net income of $5 million. The company distributed $1.75 million as dividends to its shareholders last year. What is the firm's self-supporting growth rate? o 0.95% o 4.72% O 2.22% 0 1.18% Which of the following are assumptions of the self-supporting growth model? Check all that apply. The firm must issue the same number of new common shares that it issued last year. The firm uses all equity and no debt financing. The firm pays out a constant proportion of its earnings as di The firm will not issue any new common stock next year.

Explanation / Answer

1) Firm's self-supporting growth rate:

= Return on Equity x (1-Dividend payout ratio)

Return on Equity = Net income / equity = 5 / 150 = 3.33%

Dividend payout ratio = Dividends /Net income = 1.75 / 5 = 0.35

SGR = ROE x (1-Payout ratio)

= 3.33% x (1-0.35) = 2.22%

2) The correct options are:

The firm uses all equity and no debt financing.

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