Does sustainable growth rate assume growth is generated through internal funds AND debt? or is it just internal funds?
Internal funds and debt. Include assumption of debt to keep capital structure static, otherwise debt/equity ratio would decrease.
Thank you for the clarification!
One of the topic test answers states just internally generated funds, while the other answers say that it’s internally generated funds + debt
Not following - do you mean a single question indicated the answer is internally generated funds? Can you provide more context (the excerpt from the TT, the question, and the answer w/ explanations)?
I know what he’s talking about. Those two questions are from CFAI topic tests, and they are each from a separate item set. One item set states exactly what you have said in the first post. However, on the other item set, it states “A company’s sustainable growth rate assumes growth through internally generated funds and approximates the average rate at which dividends can grow over a long horizon.”
By definition… Sustainable growth rate is = ROE X RR (Rentention rate). Hence, via internally generated funds.