A firm has a fixed debt-to-equity ratio and dividend policy. Assets and net income are proportional to sales, and new equity will not be issued. Which of the following statements is most correct?
A) Almost any growth rate is theoretically possible.
B) Only one growth rate is possible.
C) The firm cannot grow.
D) The firm's growth rate must be less than some maximum.

Question

Quizplus · Accepted Answer

Given the constraints (fixed debt-to-equity ratio, dividend policy, no new equity issuance, and assets and net income proportional to sales), the firm can sustain only one growth rate that can be financed through its retained earnings. This is known as the sustainable growth rate.

A Firm Has a Fixed Debt-To-Equity Ratio and Dividend Policy