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Non-spontaneous External Capital

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Assume that an average firm in the office supply business has a 6 percent after-tax profit margin, a 40 percent debt/assets ratio, a total assets turnover of 2 times, and a dividend payout ratio of 40 percent. Is it true that if such a firm is to have any sales growth (g>0), it will be forced either to borrow or to sell common stock (that is, it will need some nonspontaneous, external capital even if g is very small)?

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Solution Preview

Sustainable growth rate with internal sources of capital only:
G = Margin x Turnover x Retention = ...

Solution Summary

Provides steps necessary to determine whether or not the given statement is true.

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