Suppose a firm forecasts sales growth larger than its sustainable growth rate,but plans to add fewer assets than the current asset to sales ratio implies.If other aspects of the firm's performance remain constant,the pro forma external funds required (EFR)

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The sustainable growth rate formula is: Sustainable Growth Rate = (Net Income / Sales) x (Sales / Total Assets) x (1 - Dividend Payout Ratio). If the firm forecasts sales growth larger than its sustainable growth rate, the firm will need external funds to finance its growth. However, if the firm plans to add fewer assets than the current asset to sales ratio implies, the asset turnover will increase, which means that the firm can generate more sales with fewer assets. Therefore, the firm will not need as much external funds as the sustainable growth rate implies. This means that the pro forma EFR will likely be smaller than the sustainable growth rate implies.

Suppose a Firm Forecasts Sales Growth Larger Than Its Sustainable