Other things equal,a firm's sustainable growth rate could increase as a result of:

Question

Quizplus · Accepted Answer

The sustainable growth rate is defined as the maximum rate at which a firm can grow without obtaining additional external financing while maintaining a constant debt-to-equity ratio. One way to increase this rate is by increasing the plowback ratio, which is the portion of earnings that are reinvested back into the business instead of being paid out as dividends. By retaining more earnings for reinvestment, the firm can finance its growth without relying on external financing. Therefore, increasing the plowback ratio can lead to an increase in the sustainable growth rate.

Option B is incorrect because increasing the payout ratio (portion of earnings paid out as dividends) would decrease the plowback ratio and hence, the sustainable growth rate.

Option C is incorrect because decreasing the return on equity (ROE) would reduce the firm's profitability and hence, its ability to generate earnings to fund growth. This would lead to a decrease in the sustainable growth rate.

Option D is incorrect because increasing total assets by itself would not necessarily lead to an increase in the sustainable growth rate. The sustainable growth rate is determined by various factors such as profitability, reinvestment, and financing decisions.

Other Things Equal,a Firm's Sustainable Growth Rate Could Increase as a Result