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-   -   How to Calculate Sustainable Growth Rate (https://www.askmehelpdesk.com/showthread.php?t=192436)

  • Mar 8, 2008, 01:54 PM
    Fess1076
    How to Calculate Sustainable Growth Rate
    How do you calculate Sustainable Growth Rate when you have:

    Total Assets = $600
    Equity = $400
    Net Income = $150
    Dividends = $45
    Earnings Retained = $105

    I calculated the plowback ratio to be .5714 based on dividends and earnings retained.

    I calculated ROE to be .375 based on Net Income and Equity.

    However I am not coming up with the right answer. Can anyone help?
  • Jan 24, 2010, 10:55 AM
    sharon0203
    Hi there!
    you don't get the rigt answer because your plowback ratio is calculted wrong.
    You have to see how much of the net income is retained.
    so this will be 105/150= 0,7 plowback ratio

    now it is possible to fill in the sustainable growth ratio
    (ROE/ b) / 1-ROE x b

    (0,375 x 0,7 ) / ( 1-0,375 x0,7) = 0,3559
    0,3559 x 100 = 35,59% is the max rate which the company can expand per year without external equity financing

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