A firm’s sustainable growth rate can be calculated using the formula Sustainable growth rate = (p(S/A)(1 + D/E) x R) / [1 – (p(S/A)(1 + D/E) x R)] Discuss the relationship between sustainable growth rate and each of the four variables in the above formula

A firm’s sustainable growth rate can be calculated using the formula Sustainable growth rate = (p(S/A)(1 + D/E) x R) / [1 – (p(S/A)(1 + D/E) x R)] Discuss the relationship between sustainable growth rate and each of the four variables in the above formula

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter9: Projecting Financial Statements

Section: Chapter Questions

Problem 8DQ

See similar textbooks

Related questions

Q: Based on the key indicators tabulated in the table below and the readings and resources provided for…

A: In firm, A and firm B the p/e ratio is same for both the firms earning per share is high for firm…

Q: A firm wants a sustainable growth rate of 2.73 percent while maintaining a dividend payout ratio of…

A: The debt-equity ratio is a measure of the creditors' and shareholders' or owners' respective…

Q: A firm has decided that its optimal capital structure is 100% equity-financed. It perceives its…

A: a)-1 Retention Ratio = 1- payout ratio Retention Ratio = 1-0.60 Retention Ratio = 0.40

Q: 1. What is the Internal Growth rate for Cafes Richard ? What is the sustainable growth rate for…

A: Compute the internal growth rate as follows:

Q: What is the rate of return for a company if its β is 1.8, risk free rate of return is 17% and the…

A: The rate of return of a company can be calculated using Capital Asset Pricing Model(CAPM).

Q: How do you set up a two-stage dividend growth model on excel?

A: Companies with an uncertain initial growth rate can be valued using the two-stage model. In the…

Q: How could I estimate the Sustainable Growth Rate considering the ROE?

A: The sustainable growth rate (SGR) is the maximum rate of growth that a company can sustain without…

Q: What is the implied growth duration of Freed Industries given the following?

A: Implied Growth Duration: It is computed based on the implied growth rate to arrive at the implied…

Q: If the SGS Corp. has an ROE of 14.5 percent and a payout ratio of 25 percent, what is its…

A: A maximum growth rate at which a company can sustain itself without raising additional funds from…

Q: Calculate the sustainable growth rate given the following information: debt/equity ratio = 40%;…

A: Sustainable Growth rate is the maximum growth rate that a firm can expect from its sales or revenue…

Q: As a consultant to Bass Inc, you have been provided with the following data D1= $0.67, P0= $27.50…

A: Dividend first year (D1)=0.67 Current stock price (P0)=27.50 Constant growth rate (g) =8%

Q: In the endogenous growth model, suppose that there are three possible uses of time. Let u denote the…

A: Fraction is an important part of mathematics as it is basically type of division.Unemployment is a…

Q: Which of the following is true? O a) The retention rate is the rate at which assets can grow using…

A: Meaning of Internal Growth Rate : - Internal growth rate is the maximum rate of growth in sales and…

Q: Provide examples and explain each; leading, lagging and coincident indicators when the economy is in…

A: Economic Indicators: There are mainly 3 types of indicators based on which investors take their…

Q: How would an increase in each of the following factors affect the AFN?1. Payout ratio2. Capital…

A: Additional funds needed (AFN): Further funds necessary to sustain an increased revenue level (AFN)…

Q: (a)What is the significance of the internal growth rate? The sustainablegrowthrate? (b)Assume that…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Which one of the following is the maximum growth rate that a firm can achieve without any additional…

A: External financing need (EFN) is the financial requirement of a company which is directly…

Q: Assuming constant capital intensity ratio and full-capacity operation, the increase in total assets…

A: External Funds Required: The external funds required for any year are forecasted based on the…

Q: Consider the following information regarding a new investment that a company intends to undertake:.…

A: Calculation of correlation between the two returns: Excel workings:

Q: You are given the following information on Kayla's Heavy Equipment: Profit margin Capital intensity…

A: The formula used is shown:

Q: A firm’s sustainable growth rate can be calculated using the formula Sustainable growth rate =…

A: The four variables in the sustainable growth rate formula are: Profit Margin(p) Dividend Policy…

Q: equityholders at date 1? What kind of financial product has the same payoffs? Please describe the…

A: a)At date 1 ,two possible values are possible: 100*120%=120 or 100*90%=90 d=downmove=0.9 and upmove…

Q: Mummy Steak House has a return on assets (ROA) of 10.9%, a return on equity (ROE) of 16.7%, and a…

A: The sustainable growth rate is calculated as return on equity multiplied by retention ratio.

Q: Find the Fundamental value using dividend growth model with the historical growth rate, and Find…

A: Historical growth rate is the rate at which dividend has been grown in the past. Sustainable growth…

Q: a. Using net present worth analysis, calculate the rate of return for all four alternatives, and b.…

A: The methods stated above namely the net present worth analysis and the ROR analysis or rate of…

Q: Write out and explain the valuation formula for a constant growthstock.

A: Valuation Formula for a constant growth stock is shown below: Here, P0 = Intrinsic Value of stock…

Q: Which of the following statements is (are) FALSE? Select one or more alternatives: When sales of a…

A: This is an important criteria in order to understand the capital decisions regarding investment in…

Q: Firms with the ____ earnings growth tend to have the ____ dividend payout ratio. a. lowest;…

A: Earnings Growth is related with dividend payout ratio.

Q: Consider the following information for kalebs kick boxing: profit margin 9.4%, capital intensity…

A: Calculation of sustainable growth rate: Answer: Sustainable growth rate is -250.15%

Q: If the firms earns rate of return on its investments equal to the required rate of return it is…

A: The rate of return on its investments reflects the return earned on the given investment by the…

Q: Assume that the following ratios are constant. Total asset turnover 1.37, profit margin 6.9%, equity…

A: Total asset turnover =1.37 profit margin= 6.9% equity multiplier= 1.7 payout ratio=57%.

Q: Calculate the sustainable growth rate given the following information: debt/equity ratio = 60%;…

A: Given:

Q: Describe a situation in which an M&A modeller will choose a 3-stage growth model to analyse a…

A: The financial model is the kind of financial statements of the company which are helpful to compute…

Q: You are given the following information on Kaleb's Heavy Equipment: Profit margin Capital intensity…

A: The formula for the calculation of sustainable growth rate is Sustainable growth rate=ROE x b1-ROE…

Q: hich of the following best describes the sustainable growth rate? The minimum growth rate that…

A: The highest growth rate which leads to maximum sales with no additional funds is sustainable growth…

Q: Current Ratio Explain what it means for a firm to have a current ratio equal to .50. Would the firm…

A: Current ratio is the value of the current asset divided by the current liabilities. It helps in…

Q: Assume the following ratios are constant. Total asset turnover 1.49 Profit margin 8.7%…

A: Step 1: introduction Sustainable growth rate is the maximum sustainable growth rate of a company…

Q: Synyster Corp. has an ROE of 11 percent and a payout ratio of 19 percent. What is its…

A: A company have so many ways to raise funds for growth or…

Question

A firm’s sustainable growth rate can be calculated using the formula

Sustainable growth rate = (p(S/A)(1 + D/E) x R) / [1 – (p(S/A)(1 + D/E) x R)]

Discuss the relationship between sustainable growth rate and each of the four variables in the above formula

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Similar questions

Assume that the following ratios are constant. Total asset turnover 1.37, profit margin 6.9%, equity multiplier 1.7, payout ratio 57%. What is the sustainable growth rate?
Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing? A. External growth rate B. Internal growth rate C. DuPont rate D. Cash flow rate
Based on the information in the table, what is the growth duration for Georgia Gauge? Report your answer rounded to one decimal place. P/E Ratio Expected Growth Rate Dividend Yield Answer: S&P Industrials Georgia Gauge, Inc. 25 0.16 0.02 16 0.05 0.04
Can you show step-by-step working, using the Gordon Growth model for calculating the Rebound Growth rate (C56) without using excel?
You use a one-stage DDM to value a typical mature U.S. company. Which of the following estimates of its (stable) earnings growth rate would be most reasonable? 30% 5% 25% 20%
What is the significance of knowing growth rate per share using the Constant Growth Model?
Define the term self-supporting growth rate. What is Hatfield’s self-supporting growth rate? Would the self-supporting growth rate be affected by a change in the capital intensity ratio or the other factors mentioned in the previous question? Other things held constant, would the calculated capital intensity ratio change over time if the company were growing and were also subject to economies of scale and/or lumpy assets?
I need detailed explanation for the following question If a firm bases its growth projection on the rate of sustainable growth, shows positive net income, and has a dividend payout ratio of 30 percent, then the: A. fixed assets will have to increase at the same rate, even if the firm is currently operating at only 78 percent of capacity.B. number of common shares outstanding will increase at the same rate of growth.C. debt-equity ratio will have to increase.D. debt-equity ratio will remain constant while retained earnings increase.E. fixed assets, the debt-equity ratio, and number of common shares outstanding will all increase
hich of the following best describes the sustainable growth rate? The minimum growth rate that can be achieved without raising external funds The maximum growth rate that can be achieved without raising external funds The minimum growth rate that can be achieved while maintaining the firm's dividend policy The maximum growth rate that can be achieved while maintaining the firm's dividend policy
Consider the following scenario and complete the last column and then Assess the sensitivity of the price-earnings ratio to changes in the cost of equity capital and changes in the growth rate: Table 9 Estimating price earning(P/E) ratios under various scenarios Scenario Cost of Equity Capital Growth Rate in Earnings P/E Ratio 1 0.13 0.09 2 0.13 0.11 3 0.15 0.09 4 0.18 0.09 5 0.18 0.11
A firm wants a sustainable growth rate of 3.73 percent while maintaining a dividend payout ratio of 39 percent and a profit margin of 8 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?
Define the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant? Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate, the amount of accounts payable, the profit margin, and the payout ratio.