The question is: Is there any way to grow faster than SGR without issuing additional common stock? (assuming ROE constant and CS constant) We have established that the firm can grow faster than SGR _if_ it issues additional stock. The fact that it also has to issue debt is in my view irrelevant. What matters is that there is no way for it to grow faster than SGR without issuing more stock (with or without issuing debt). You can only answer “false” if you find another way of growing faster than SGR without issuing additional equity. … and I’m gonna drop the CFA stuff for tonight 
Alright I agree with you the answer is true but not for the reasons you have mentioned, and also because the question is sh!t since it could as easily be rewritten to say “the company must issue debt” because to keep CS constant while achieving a supernormal growth rate requires issuing both debt and equity. The reason, a company that is growing at SGR can grow faster either by issuing debt or equity (if ROE is fixed), here we are limited to the unique case (where the CS is also fixed) such that both debt and equity must increase in order to grow faster than SGR. What made this so confusing for me is the fact that the growth at above SGR comes from scale, i.e. the ROE is the same and so is retention. Let me demonstrate what I mean: Suppose we have a company with 100 in debt and 100 in equity, and retention of 50%, and roe of 10%, this company has an SGR of 5%. The hard part is truly grasping what this SGR means. It means the company grows revenue at 5%, the dividend at 5%, and NI at 5% (this is the crucial insight). Now suppose this same company issues 900 equity right after the end of the last period in which it earned 10 (ROE*equity=NI) (accompanied with 900 debt since we have the additional constraint of constant CS). Now we have this company with D=1000, E=1000, ROE still at 10% and retention still at 50%. Going forward the company still has SGR=5%, however look at what has happened in the period right after the prior one if we compare dividends and NI: Period 1 NI=10 Dividend=5 Period 2 NI=100 Dividend=50 Growth from period 1 to 2: NI=900% Dividend=900% i.e. clearly way more than 5%. Again, I stress that the difficulty is in getting your head around what is going to be growing at more than SGR (sales, dividends, and ni) and why (due to a larger scale with the same ROE). Note also that for the following period growth to exceed SGR the company must again raise equity, issue debt, or do both in order to increase its scale (while maintaining its ROE). Hence, this type of growth is ST and of the one-of variety. Hope this helps someone as much as it helped me thinking about it and getting it all on “paper.”