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Attention: Due to a bug in Google Chrome, this page may not function correctly. Click here to learn more. Aa Aa 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 ha revenues last year were $120,000,000 with a net income of $3,000,000. The co dividends to its shareholders last year. s $200,000,000 in assets. Its sales mpany distributed $150,000 as Given the information above, what is Bohemian Manufacturing Company's sustainable growth rate? 1.60% 0.08% 0.41% 1.45% Which of the following are assumptions of the sustainable (self-supporting) growth model? Check all that apply The firm will not issue any new common stock next year. The firm's total asset turnover ratio remains constant. The firm pays out a constant proportion of its earnings as dividends. The firm's liabilities and equity must increase at the same rate.

Explanation / Answer

ROE = $3,000,000/$200,000,000 = 1.50%

Retention ratio = ($3,000,000-$150,000)/$3,000,000 = 95%

Sustainable growth rate = ROE×Retention ratio÷(1-ROE×Retention ratio)

= (1.50%×95%)/(1-(1.50%×95%))

= 1.45%

Hence, correct options are “1.45%” and “The firm will not issue any new common stock next year”

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