SusGrowthRate

SusGrowthRate - Sustainable growth rate(SGR Assumptions 1 The rms asset will grow in proportion to its sales 2 Net income is a constant proportion

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Sustainable growth rate (SGR) Assumptions 1. The ﬁrm’s asset will grow in proportion to its sales 2. Net income is a constant proportion of sales 3. The ﬁrm has a given dividend-payout policy and a ﬁxed D/E ratio 4. The ﬁrm will not change the number of outstanding shares of stock. Then only one growth rate is consistent with these assumptions, and this rate is called the SGR. Principle: Change in asset = change in debt + change in equity Notation: T : ratio of total asset to sales T = A S 0 p : net proﬁt margin on sales d : dividend payout ratio D : Debt amount E : equity amont A = D + E S 0 : Sales this year S 1 : Next year’s projected sales S 1 - S 0 = Δ S Steps to obtain SGR 1. If the ﬁrm increases sales by Δ S , the asset increases by, from assumption 1, A · S 1 S 0 - A = A Δ S S 0 = T · Δ S. Next year’s asset: A + T · Δ S 2. Since no new shares are issued, equity increase is coming from earning. Next year’s projected retained earning is

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This note was uploaded on 04/24/2010 for the course ACTSC 371 taught by Professor Wood during the Spring '08 term at Waterloo.

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SusGrowthRate - Sustainable growth rate(SGR Assumptions 1 The rms asset will grow in proportion to its sales 2 Net income is a constant proportion

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