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    Fess1076's Avatar
    Fess1076 Posts: 1, Reputation: 1
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    #1

    Mar 8, 2008, 01:54 PM
    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?
    sharon0203's Avatar
    sharon0203 Posts: 2, Reputation: 1
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    #2

    Jan 24, 2010, 10:55 AM
    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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