Problem: Assume that a firm has a net income in 20x9 of $20 and its end-of-year 20x8 total assets were $450. Further assume that the firm has a standing requirement to maintain a debt/equity ratio of 0.8, and that its managers are prohibited from further borrowing or stock issuance.
Q1. What is this firm's maximum sustainable growth rate?
Q2. If the firm pays $6 of the $20 net income as a dividend, and plans to maintain this payout ratio into the future, now what is
its maximum sustainable growth rate?
Q3. If the firm uses $12 of the $20 net income to repurchase some of its outstanding shares, now what is its maximum sustainable growth rate?
Q4. If the firm takes action as described in parts (2) and (3), what would its maximum sustainable growth rate be?