MT Ltd. has approached you for an additional loan of 20 crores to fund its aggressive expansion plans. The company's current sustainable growth rate…

Key Concerns: (i) Excessive Debt Risk: The loan request creates a potentially risky situation of too much debt and too little equity, as the company's debt-to-equity ratio is already at the maximum limit of 2.5:1. (ii) Growth Rate Mismatch: The company's planned growth rate (16%) exceeds its sustainable growth rate (10%), which cannot be maintained without increasing financial leverage beyond permissible limits. (iii) Inflationary Impact: The 5% inflation increases the amount of external financing required and increases the debt-to-equity ratio when measured on a historical cost basis. Thus, inflation lowers the firm's sustainable growth rate. Alternative Courses of Action: (i) Raise Additional Equity: The Company must raise additional equity capital to support the higher growth rate while maintaining the debt-to-equity ratio within permissible limits. (ii) Reduce Expansion Rate: The Company will have to reduce the rate of expansion to a level (10% or lower) that can be sustained without an increase in financial leverage, aligning actual growth with sustainable growth rate.