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View Full Version : How to calculate sustainable growth?


meeechie
Aug 17, 2011, 03:25 PM
How to calculate sustainable growth with:

Profit margin 8.2%
Capital intensity ratio .75
Debt equity ratio .40
Net income $43,000
Dividends $12,000

ArcSine
Aug 18, 2011, 05:31 AM
The sustainable growth rate (let's call it g*, following common practice) is the result of multiplying two factors: Return on Equity (ROE, which is the ratio Net Income / Equity) and the firm's retention rate (or plowback rate, which is 1 - the payout rate) We'll call that latter factor R.

So g* = ROE x R

You have in your given data all the ingredients needed for this cocktail. Especially when you note that ROE is itself the result of multiplying three factors:

Profit margin (the ratio Net Income / Sales)
Asset turnover (Sales / Assets)
Capitalization (Assets / Equity)

One final clue, then back to you to solve: The Capital Intensity ratio is just the reciprocal of the Asset Turnover ratio.

meeechie
Aug 18, 2011, 03:18 PM
Thank you! Extremely helpful

ArcSine
Aug 19, 2011, 04:35 AM
Glad it helped, M. Best of luck with your studies.

msmisty
Sep 14, 2011, 01:53 PM
Can u show me calculations for this promblem
Thank u