Final answer:
The sustainable growth rate is defined as the maximum growth rate a firm can achieve without external financing, meaning no new debt or equity. It relies on internal funding, primarily through retained earnings.
Step-by-step explanation:
The sustainable growth rate is the maximum rate at which a firm can grow under certain financial conditions. Specifically, it is the maximum growth rate a firm can achieve without requiring additional external financing, or maintaining a certain capital structure. The question addresses different scenarios to identify which condition defines this rate.
Answering the question, the sustainable growth rate is defined as the maximum rate at which a firm can grow given condition (a) No new external financing of any kind. This means the company can only rely on its internal resources, such as retained earnings, to finance its growth. The firm must manage its operations and investments in such a way that it does not need to seek external funding, either through debt or equity.
Understanding the powerful effect of compounded growth is fundamental to appreciating why firms aim for sustainable growth. Like savings that grow with compound interest, a firm's growth compounded over time can lead to significant increases in the standard of living and the economy.