A Firm Expects Growth Next Year to Be 10

question 68

Multiple Choice

A firm expects growth next year to be 10%. Its sustainable growth rate is 12%. Which of the following is true?

• A) The firm will need to raise additional debt such that its debt to equity ratio will increase.
• B) The firm may be able to keep its debt to equity ratio the same by reducing dividends (assuming they are projected to be high enough).
• C) The firm will need to raise additional capital through a stock issue.
• D) The firm will have excess cash to increase dividends, pay back debt, or repurchase equity.

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Definitions:

Convertibles

Refers to convertible bonds or preferred stocks that can be converted into a predetermined amount of the company's equity at certain times during their life, usually at the discretion of the bondholder.

Warrants

Financial instruments that give the holder the right, but not the obligation, to buy a company's stock at a specific price before a certain date.

Conversion Price

The predetermined price at which convertible securities, like bonds or preferred stocks, can be exchanged for a specified amount of another form, typically common stock.

Expected Return

Expected return is the anticipated amount of profit or loss an investment is projected to generate, based on historical or forecasted performance.