Question

The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate. It can be calculated by using the AFN equation with AFN equal to zero and solving for g.

TRUE OR FALSE?

Answer 1

FALSE. The sustainable growth rate of a firm is not calculated by setting AFN equal to zero in the AFN equation. The formula for sustainable growth rate is: Sustainable Growth Rate (g) = Return on Equity (ROE) x Retention Ratio (RR)

Step-by-step explanation:

FALSE. The sustainable growth rate of a firm is not calculated by setting AFN equal to zero in the AFN equation. The AFN equation is used to calculate the additional funds needed by a firm to support its growth. The formula for sustainable growth rate is:

Sustainable Growth Rate (g) = Return on Equity (ROE) x Retention Ratio (RR)

The ROE is the firm's net income divided by its equity, and the RR is the proportion of earnings that are retained in the business. By using these two factors, we can calculate the maximum rate at which a firm can grow its sales without relying on external capital.