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Therefore:
Growth rate of shareholder’s Equity
Net Income
= Earning Retention Rate x
Share holder’s Equity
In Other Words:
Growth rate of Shareholder’s Equity = Earnings Retention Rate x ROE
Sustainable Growth Rate = Earnings Retention Rate x ROE
Sustainable growth rate = growth rate of shareholder’s equity
Therefore:
Growth rate of shareholder’s Equity
Net Income
= Earning Retention Rate x
Share holder’s Equity
In Other Words:
Growth rate of Shareholder’s Equity = Earnings Retention Rate x ROE
Sustainable Growth Rate = Earnings Retention Rate x ROE
DISCUSSION
Last year sales were $1 million. This means that assets were $2
million, and debt and shareholder’s equity were $1 million each.
Because ROE was 20%, net income must have been $200,000 of
which $80,000 was paid out of dividends and $120,000 retained as
new sales by as much as $120,000.
Assets Turnover= 0.5 Time per Year
Debt/Equity Ratio= 1.0
Dividend Payout Ratio= 0.4
ROE= 20% per Year
− 𝒕𝒂𝒙𝒆𝒔
𝑵𝒆𝒕 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝑨𝒇𝒕𝒆𝒓 𝑻𝒂𝒙 (𝑵𝑶𝑷𝑨𝑻)
■ Unlike market-based measures, such as Market Value Added (MVA), EVA can
be calculated at divisional (Strategic Business Unit) levels.
■ unlike stock measures, EVA is a flow and can be used for performance
evaluation over a certain period.
■ Unlike accounting profit, such as Earnings Before Interest and Tax (EBIT), Net
Income and Earnings per Share (EPS), EVA is economic. EVA is based on the
concept of businesses having to cover both operating costs and capital costs.
Some specific uses of EVA include:
■ To set organizational goals
■ Performance measurement
■ Determining of bonuses
■ Communication with shareholders and investors
■ Motivation of managers
■ Capital budgeting
■ Corporate valuation
■ Analyzing equities
DISCUSSION
BALANCE SHEET, INCOME STATEMENT, CASH FLOW
The Ruffy Stuffed Toy Company’s balance sheet at the end of 19x7 was as follows:
RATIOS:
ROS 22750 431000 0.0528
ROA 22750 156473.13 0.1454
ROE 13162.5 67223.13 0.1958
Receivables 431000 58000 7.431
Turnover
Inventory Turnover 250000 35500 7.0423
Asset Turnover 431000 156473.13 2.7545
Debt 84000 157146.25 0.5345
Times Interest Earned 22750 2500 9.1
Current 157146.25 84000 1.87
Quick 91,896.25 47000 1.9552
P/E 4.625 0.6581 7.0278
Mkt to Book 4.625 3.6573 1.2646