Presentation on theme: "NOTATION èA/S = increase in assets per $ increase in sales. èL/S = increase in spontaneous liabilities per dollar increase in sales. èS 0 = current level."— Presentation transcript:
NOTATION èA/S = increase in assets per $ increase in sales. èL/S = increase in spontaneous liabilities per dollar increase in sales. èS 0 = current level of sales. èg = projected growth rate in sales. èM = net profit margin on sales. èd = dividend payout ratio. èB/E = ratio of int.-bearing debt to equity
ADDITIONAL FUNDS NEEDED (AFN) AFN = (A/S)gS 0 Required increase in assets – (L/S)gS 0 Increase in spontaneous liabilities – MS 0 (1+g)(1-d)Flow of retained earnings for the year – (B/E)(MS 0 )(1+g)(1-d)Increase in external debt
SUSTAINABLE GROWTH RATE èThe maximum rate at which the firm can grow without changing its capital structure and without issuing new equity èTo find the sustainable growth rate, set AFN = 0 and solve for g:
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