Which of the following factors is most likely to decrease a firm's sustainable rate of growth?

• A. An increase in technological innovation
• B. Improved access to natural resources
• C. A reduction in the availability of skilled labor
• D. Greater investment in physical capital

Answer: (C)

Verified step by step guidance

1. Understand that a firm's sustainable growth rate (SGR) is the maximum rate at which a firm can grow its sales, earnings, and dividends without having to raise external equity financing. It depends on factors like profitability, dividend policy, financial leverage, and asset utilization.
2. Recognize that factors increasing productivity, efficiency, or resource availability (such as technological innovation, access to natural resources, or investment in physical capital) generally support or increase the sustainable growth rate by enabling higher output or profits.
3. Consider that a reduction in the availability of skilled labor can constrain a firm's ability to maintain or increase production efficiently, which can reduce profitability or slow expansion, thereby decreasing the sustainable growth rate.
4. Analyze how each option affects the components of the sustainable growth rate formula, which can be expressed as: \[ SGR = ROE \times b \] where \(ROE\) is return on equity and \(b\) is the retention ratio (portion of earnings reinvested). A reduction in skilled labor availability can lower \(ROE\) by reducing productivity and profitability.
5. Conclude that among the options, a reduction in the availability of skilled labor is most likely to decrease the firm's sustainable growth rate because it directly limits the firm's operational capacity and profitability.