Fin Mgmt Chapt4 - Managing Growth

Question 1

Describe Sustainable Growth Rate

Answer 1

1. Maximum rate a firm can increase sales without depleting financial resources
2. g* = ChangeInEquity/EquityBeginningOfPeriod
3. R = retention rate = 1- dividend payout ratio
4. g* = R * ROE(BOP) = PRAT
   =profitmargin * retentionrateassetturnoverT
   = R* T*ROA
5. T = financial leverage with beginning of period equity in denominator

Question 2

Actions if Sales Growth is above or below Sustainable Growth Rate

Answer 2

1. If Sales Growth above sustainable growth rate
   
   1. 1 if a temporary problem, increase borrowing
   2. 2 can be managed by:
   3. 2.1 increasing financial leverage
   4. 2.2 reducing dividend payout ratio
   5. 2.3 pruning marginal activities, products, or customers
   6. 2.4 outsourcing production activities
   7. 2.5 increasing prices
   8. 2.6 merging with a cash cow
   9. 2.7 selling new equity
2. If Sales growth below sustainable growth rate
   
   2. 1 produces excess cash
   3. 2 if a temporary problem, accumulate resources
   4. 3 if longer term, these are productive uses for excess cash:
      
      2. 3.1 reducing financial leverage
      3. 3.2 returning money to shareholders
   5. 3.3 cutting prices
   6. 3.4 acquiring growing firms