Difficulty: Easy

Average Score: 100%

A firm wants to avoid issuing new equity and maintain its current level of debt. What must this firm do in the future?

Rationale

Grow at its sustainable growth rate.

To maintain its current level of debt while avoiding the issuance of new equity, a firm must grow at its sustainable growth rate. This rate reflects the maximum growth achievable without the need for additional external financing, allowing the firm to leverage its existing resources effectively.

A (Use the percent-of-sales method to predict its future sales growth) YOUR ANSWER

While the percent-of-sales method is a forecasting tool useful for estimating future sales, it does not directly address the firm's need to maintain its current debt level. This method focuses on sales projections rather than ensuring growth aligns with sustainable financial practices.

B (Prevent future growth by slowing sales) YOUR ANSWER

Deliberately slowing sales contradicts the firm's objective of growth. Such a strategy would hinder the firm’s potential profitability and market position, which is counterproductive to maintaining overall financial health and stability.

C (Grow at its sustainable growth rate) CORRECT

This option is correct because the sustainable growth rate allows the firm to expand its operations and revenues without exceeding its financial capabilities or requiring new equity. It ensures that growth is managed within the confines of existing debt levels and retained earnings.

D (Obtain additional financing equal to its discretionary financing needed) YOUR ANSWER

Seeking additional financing would contradict the firm’s goal of avoiding new equity issuance and maintaining its current debt level. This approach could lead to increased leverage and financial risk, which the firm aims to avoid.

Conclusion

To avoid issuing new equity and sustain its current debt levels, a firm must focus on growing at its sustainable growth rate. This strategy enables the firm to expand without necessitating new external financing, thus preserving financial stability while supporting its growth ambitions. All other options either do not directly address the firm's objectives or contradict its financial strategy.

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