What is the sustainable growth rate based on?

The sustainable growth rate (SGR) is based on the concept of maintaining a constant debt-equity ratio while factoring in the company's ability to reinvest earnings to fund its growth. This rate reflects how fast a company can grow its sales, earnings, and dividends without having to increase its financial leverage beyond current levels.

When taking on debt, a company must manage its debt-equity ratio so that it does not indicate excessive financial risk. By assuming a constant debt-equity ratio, the sustainable growth rate allows for a balance in financing growth using both retained earnings and external debt. This focus ensures that the company's capital structure remains stable as it grows, aligning with the firm's long-term financial strategy.

The other options, while relevant to business dynamics, do not directly address the fundamental mechanics of calculating the sustainable growth rate. Increase in consumer demand and reduction in fixed costs can influence overall business performance but do not specifically relate to the growth rate calculation when considering debt and equity dynamics. Higher interest rates affect borrowing costs, potentially altering investment decisions, but again, they are not the primary factor in determining a company's sustainable growth rate.