Triumph Company has total assets worth $6,413,228. Next year it expects a net income of $3,145,778 and will pay out 70 percent as dividends. If the firm wants to limit its external financing to $1 million, what is the growth rate it can support?

Triumph Company is able to support an annual growth rate of 14.8%, if its goal is to keep external borrowing to less than $1 million. This calculation takes into account the firm’s retained earnings which are determined by subtracting dividends from net income, so in this case the retained earnings would be $3,145,778 – (0.7 x 3,145,778) = $943,734.

The growth rate is then calculated by dividing the change in retained earnings by beginning total assets and multiplying it by 100: ($943,734/$6,413,228)*100 = 14.8%. Triumph Company could support a rate of growth up to 14.8%, if its goal is to restrict external financing at $1 million.

How well a management team has managed capital investments and expenditures over the past years will determine how fast a business can grow. Companies that have been able to generate returns from their resources will typically be better positioned than those who haven’t as they will have more available funds for future expansion projects.

While some businesses may not require additional funding now, they must be ready in the event that economic conditions suddenly and unexpectedly change. This may mean taking on loans or issuing securities.

Understanding how much growth room is available can ultimately help businesses make more informed decisions on resource allocation. It will also allow them to determine if additional funding from external sources might be required in the future.