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NOTATION

NOTATION. A/S = increase in assets per $ increase in sales. L/S = increase in spontaneous liabilities per dollar increase in sales. S 0 = current level of sales. g = projected growth rate in sales. M = net profit margin on sales. d = dividend payout ratio.

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NOTATION

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  1. NOTATION • A/S = increase in assets per $ increase in sales. • L/S = increase in spontaneous liabilities per dollar increase in sales. • S0 = current level of sales. • g = projected growth rate in sales. • M = net profit margin on sales. • d = dividend payout ratio. • B/E = ratio of int.-bearing debt to equity

  2. ADDITIONAL FUNDS NEEDED (AFN) AFN = (A/S)gS0Required increase in assets – (L/S)gS0Increase in spontaneous liabilities – MS0(1+g)(1-d)Flow of retained earningsfor the year – (B/E)(MS0)(1+g)(1-d) Increase in external debt

  3. SUSTAINABLE GROWTH RATE • The maximum rate at which the firm can grow without changing its capital structure and without issuing new equity • To find the sustainable growth rate, set AFN = 0 and solve for g:

  4. SUSTAINABLE GROWTH FOR GI

  5. AFN AND GROWTH RATE

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