A firm expects growth next year to be 10%. Its sustainable growth rate is 12%. Which of the following is true?
A) The firm will need to raise additional debt such that its debt to equity ratio will increase.
B) The firm may be able to keep its debt to equity ratio the same by reducing dividends (assuming they are projected to be high enough).
C) The firm will need to raise additional capital through a stock issue.
D) The firm will have excess cash to increase dividends, pay back debt, or repurchase equity.

Question

Quizplus · Accepted Answer

The firm's expected growth is less than its sustainable growth rate, indicating it can finance its growth internally without needing additional external capital. This may result in excess cash.

A Firm Expects Growth Next Year to Be 10