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SSC Audit Tax Finance P-II QUESTION #6188
Question 1
The 'Sustainable Growth Rate' is higher than the 'Internal Growth Rate' because it assumes:
  • The firm will issue new common stock.
  • The firm will avoid all external financing.
  • The firm maintains a constant debt ratio by borrowing as equity grows.✔️
  • The dividend payout ratio is $100\%$.
Correct Answer Explanation
Sustainable growth allows for additional debt to keep the debt-equity ratio constant as retained earnings increase equity [cite: 47].