Net income of an auto parts company was 400,000 on sales of $10 million last year. The firm paid a dividend of $100000. Total assets at the end of last year were $20 million, of which $8 million was financed by debt.
a) What is the firm’s sustainable growth rate?
b) If the firm grows at its sustainable growth rate, how much debt will have to be raised in the coming year? Confirm that the firm maintains its current debt/asset ratio.
c) What would be the maximum possible growth rate if the firm did not sell any new debt or equity in the coming year?