Sustainable Growth Rate
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When referencing a company's sustainable growth rate, an analyst is discussing the growth in earnings and dividends that can be maintained given a company's ROE and its existing capital structure.
gsustainable = b × ROE
- b = earnings retention rate = (1 - dividend payout rate)
- CFA may present candidates with a problem that requires a growth rate value, but fail to provide that growth rate value. However, it may provide ROE and either the retention rate or payout rate. If that is the case, then use the above formula to derive the growth rate and solve the problem.
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