Question 1. What is sustainable growth, and why is it important to calculate and understand this rate?
In business, the maximum growth rate that a business can sustain without having to increase its financial leverage termed as: sustainable growth rate. In general, terms, when a firm attains a sustainable growth rate, then it is in a position to continue growing without any form of support or assistance from any other source. It is vital to calculate the sustainable growth rate on firms as it enables the proprietors to determine the point that their business can flourish without any assistance. In most instances, when businesses react this milestone, their business growth or sales tend to decrease forcing them to look for alternative sources to assist with the growth (Standaert and Smedberg, 2015). It is vital to add value to the business by bringing additional customers. It is the goal of every business to attain sustainable growth rate. This, however, is not achievable to all businesses. This is because of consumer trends and planning. In the current economic climate, consumers have less disposable income while others are conservative with spending. Some firms also have the misfortune of having high sustainable growth in the short term and not sustaining it in the long term.
Question 2: What is the sustainable growth equation, what are its components, and how is it calculated?
The formula for calculating sustainable growth rate is:
SGR = Return on Equity x (1 Dividend Pay-out Ratio).
A firms sustainable growth rate is the product of the return on equity and the percentage of its profits that the proprietor chooses to plow back to the firm. While calculating the sustainable growth rate for a firm, it is imperative to maintain a specific target capital structure of debt and equity. One should also keep a static dividend payout ratio while at the same time accelerate sales depending on how the business allows.
Question 3: What are the consequences of growing a firm too fast or too slow?
When a business grows too fast, then there is need to seek assistance from external sources of funding so as to support the unexpected rate of development. In order to achieve this feat, a firm may liquidate some of its assets, take out additional loans or sell stock. When a business grows too slowly, a decision on how to spend the accrued profits must be made. Problems may arise if the business is holding more profits than it needed.
Question 4: If a company grows too fast, what funding alternatives are generally available?
While determining the alternatives to undertake in the instance that business grows too fast, it is vital to consider if the growth is based on a short or long-term basis. If the business determines that the growth rate is long-term, and then it can liquidate new equity, decrease dividend payouts and increase fiscal control. The business can also collaborate with other mature companies, outsource or increase their prices (Worsowicz et al., 2014).
Question 5: If a company grows too slow, what steps should it take to maintain its stock price?
In the instances that a firms growth is too slow, it is also vital to ascertain whether the growth is short or long term. An internal review can be conducted so as to determine if the problem leading to slow growth can be repaired. However, this process increases expenditure. A firm that is growing slowly may return money to its shareholders.
Standaert, C. J., & Smedberg, P. C. (2015). Sustainable growth rate reform is here: Should we be happy?. PM&R, 7(8), 878-882.
Worsowicz, G. M., D'Orsie, S., & Laker, S. R. (2014). The never-ending sustainable growth rate debate. PM&R, 6(8), 739-741.
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