Final answer:
A firm's sustainable rate of growth is influenced by the asset turnover ratio, profit margin, dividend policy, and financial leverage. These elements determine how efficiently a firm can grow using its internal resources and what financial strategies it employs for maximization of growth.
Step-by-step explanation:
Factors Affecting a Firm's Sustainable Rate of Growth
The sustainable rate of growth for a firm is affected by several factors. Among them, the following stand out:
- Asset turnover ratio: This measures how efficiently a firm uses its assets to generate sales. A higher ratio implies more efficient use of assets, contributing to growth.
- Profit margin: The profitability of a firm determines how much of each sales dollar is turned into profit, which directly influences reinvestment potential and growth rate.
- Dividend policy: How much profit is distributed to shareholders versus being retained can significantly impact the growth a firm can sustain without additional financing.
- Financial leverage: The use of debt can amplify growth but also increases financial risk, affecting the rate of sustainable growth.
Each of these elements contributes to what is known as the sustainable growth rate, which is the maximum rate at which a firm can grow its sales without having to increase financial leverage or seek additional equity.