Sustainable Growth Rate (SGR)

The SGR is the maximum rate at which the firm can grow by using internal sources (retained earnings) as well as additional external debt but without increasing its financial leverage (debt equity ratio). To determine SGR, the two additional assumptions are, (i) The firm has a target capital structure (D/E ratio) which it wants to maintain, (ii) The firm does not intend to sell new equity shares is it is a costly source of finance.

Suppose the Hypothetical Ltd of Example desires to grow at a higher rate than 14,94 per cent for which it proposes external funds. While raising external debt funds, it wishes to maintain its present debt-equity ratio of 1:3. Its SGR will he computed as per Equation 7.70.

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‘Ihe Equation 7,71, is identical to the high Equation (7.70) except that return on equity, ROE, is implies that given the: assumptions corporate to maintain the existing ROE beside target D/E ratio and target D/P ratio, It recalled that ROE is the product of net profit margin turnover (A) and financial leverage (A/E) ratios can be decomposed as shown in Equation 7.71.

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