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# Maximum sustainable growth rate

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Assume that a firm has a net income in 20x9 of \$20 and its end-of-year 20x8 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 managers are prohibited from further borrowing or stock issuance.

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

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

c. 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?

d. If the firm takes action as described in parts b and c, what would its maximum sustainable growth rate be?

#### Solution Preview

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

Debt/Equity = .8;

Assets = \$450; Debt = \$200; Equity = \$250;

growth rate = 20/250 =8%

b. If the firm pays \$6 of the \$20 net ...

#### Solution Summary

This posting answers the student's textbook question based on a firm's maximum sustainable growth rate.

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