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Sustainable Growth Rate, James Tompkins

This is the second lecture in the "Advanced Corporate Finance" series in which I discuss a firm's sustainable growth rate. Imagine I have a lemonade stand that can only produce a given number of sales, and the sales in turn produce a given number of profits, and from the profits I pay out a given amount of dividends, and I finance the lemonade stand with a fixed ratio of debt and equity. If in addition to this, I only go to the external capital markets for debt capital, is my lemonade stand limited by the percentage which it can grow every year? In this lecture I illustrate the answer to this question and in in turn derive the formula to what is known as a firm's sustainable growth rate.