The sustainable growth rate of a firm is best described as the:
A) minimum growth rate achievable assuming a 100 percent retention ratio.
B) minimum growth rate achievable if the firm maintains a constant equity multiplier.
C) maximum growth rate achievable excluding external financing of any kind.
D) maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
E) maximum growth rate achievable with unlimited debt financing.
F) None of the above.

Question

Quizplus · Accepted Answer

The sustainable growth rate of a firm is the maximum rate of growth that a firm can achieve without any external equity financing while maintaining a constant debt-equity ratio. It is calculated by multiplying the return on equity (ROE) by the retention ratio (1 - dividend payout ratio). In this case, Option D describes it accurately. The other options are either incomplete or incorrect descriptions of sustainable growth rate.

The Sustainable Growth Rate of a Firm Is Best Described