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    Sales Growth

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    Assume that an average firm in the office supply business has a 6% after-tax profit margin, a 40% debt/asset ratio, a total assets turnover of 2 times, and a dividend payout ratio of 40%. Is it true that if such a firm is to have any sales growth, it will be forced either to borrow (take on debt) or sell common stock? Discuss.

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    Solution Preview

    Please see the attached file.
    In order to find that out we need to calculate the Internal Growth Rate (IGR). IGR is the growth rate that a firm can have without resorting to any external financing - debt or equity.
    IGR = ROA X b /(1-ROA x ...

    Solution Summary

    The solution explains the requirement of funds and sales growth.