You are a financial consultant to a company that asks you what effect a change in leverage has on the firm's sustainable growth.Assuming all other things remain constant and if the percentage of assets that are financed with debt increases,then how will that affect the firm's sustainable growth rate?

Question

Quizplus · Accepted Answer

Increasing leverage (financing more assets with debt) typically increases the return on equity, assuming the cost of debt is less than the return on investment. This can lead to a higher sustainable growth rate because the company can grow at a faster pace without needing to increase equity.

You Are a Financial Consultant to a Company That Asks