Question

Can I use a growth rate higher than the growth rate of the economy as my stable growth rate if my firm is well-managed or if it has other stellar qualities? Question options:

A-No
B-No, but you can have a higher return on capital in a stable growth firm
C-Yes
D-Yes, and you can have a higher return on capital in a stable growth firm

Answer 1

No, you should not use a higher growth rate than the economy's rate as a stable growth rate for a firm. A firm cannot outgrow the economy indefinitely, but it may achieve a higher return on capital while growing at the same rate as the economy's growth.

Step-by-step explanation:

In considering whether you can use a growth rate higher than the economy's growth rate as a stable growth rate for a firm, even if it is well-managed or has other excellent qualities, the answer would generally be option A—No. The reason for this is that the growth rate of an economy imposes a natural limit on the growth potential of individual firms over the long term. If a firm were to grow at a rate higher than the economy indefinitely, it would eventually become the economy, which is not realistic or sustainable.

However, a well-managed firm or one with stellar qualities can achieve a higher return on capital while growing at the economy's growth rate, which is consistent with option B. Efficient operations and competitive advantages can allow a firm to generate higher profits and returns for its shareholders even when its growth rate aligns with the broader economic growth.