What Determines Growth? Firms frequently make growth forecasts on explicit part of financial planning. On the other hand, the focus of this course has been on shareholder wealth maximization, often expressed through the NPV criterion. One way to reconcile the two is to think of growth as an intermediate goal that leads to higher value. Alternatively, if the firm is willing to accept negative NPV projects just to grow in size, the shareholders (but not necessarily the mangers) will be worse off.

What Determines Growth? There is a linkage between the ability of a firm to grow and its financial policy when the firm does not issue equity. The Sustainable Growth Rate in Sales is given by:

The Sustainable Growth Rate in Sales T = ratio of total assets to sales p = net profit margin on sales d = dividend payout ratio A good use of the sustainable growth rate is to compare a firm’s sustainable growth rate with their actual growth rate to determine if there is a balance between growth and profitability.

Uses of the Sustainable Growth Rate A commercial lender would want to compare a potential borrower’s actual growth rate with their sustainable growth rate. If the actual growth rate is much higher than the sustainable growth rate, the borrower runs the risk of “growing broke” and any lending must be viewed as a down payment on a much more comprehensive lending arrangement than just one round of financing.

Increasing the Sustainable Growth Rate A firm can do several things to increase its sustainable growth rate: – Sell new shares of stock – Increase its reliance on debt – Reduce its dividend-payout ratio – Increase profit margins – Decrease its asset-requirement ratio

All sales are on account. Basket’s collection pattern is: 70 percent collected in month of sale 25 percent collected in month after sale 5 percent will be uncollectible Accounts receivable on March 31 is $30,000, all of which is collectible. All sales are on account. Basket’s collection pattern is: 70 percent collected in month of sale 25 percent collected in month after sale 5 percent will be uncollectible Accounts receivable on March 31 is $30,000, all of which is collectible. Cash Receipts Budget

Basket Company: Has a $100,000 line of credit at its bank, with a zero balance on April 1. Maintains a $30,000 minimum cash balance. Borrows at the beginning of a month and repays at the end of a month. Pays interest at 16 percent when a principal payment is made. Pays a $51,000 cash dividend in April. Purchases equipment costing $143,700 in May and $48,800 in June. Has a $40,000 cash balance on April 1. Basket Company: Has a $100,000 line of credit at its bank, with a zero balance on April 1. Maintains a $30,000 minimum cash balance. Borrows at the beginning of a month and repays at the end of a month. Pays interest at 16 percent when a principal payment is made. Pays a $51,000 cash dividend in April. Purchases equipment costing $143,700 in May and $48,800 in June. Has a $40,000 cash balance on April 1. Comprehensive Cash Budget Additional Information

$50,000 ×.16 × 3/12 = $2,000