Briefly explain what information the Sustainable Growth Rate attempts to convey to management and
investors and how the rate is calculated (you may show it by way of a ratio). In addition discuss two ways
how a firm can maintain its growth rate and how it can increase it in excess of the Sustainable Growth rate.
Name one disadvantage of each approach.
SGR = ROE x Retention ratio
= net profit/equity x [1 – payout ratio]
- Funds paid out in dividends reduces the amount of funds available to the business for growth and
reduces the SGR to decrease
o Disadvantage – SH dissatisfaction
- Increasing debt to fund growth
o Disadvantage - increased financial risk