The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its:
A)rate of return on assets.
B)internal rate of growth.
C)average historical rate of growth.
D)rate of return on equity.
E)sustainable rate of growth.

Question

Quizplus · Accepted Answer

The sustainable rate of growth is the maximum rate at which a firm can grow without having to resort to external financing while maintaining a constant debt-equity ratio. Therefore, option E is the best choice. The rate of return on assets (option A) and the rate of return on equity (option D) do not incorporate the effect of the firm's leverage. The internal rate of growth (option B) is the maximum rate at which a firm can grow without any external financing, but it does not take into account the impact of the firm's debt-equity ratio. The average historical rate of growth (option C) is not relevant in determining the maximum rate at which a firm can grow while maintaining a constant debt-equity ratio.

The Maximum Rate at Which a Firm Can Grow While