Sustainable growth rate

CFA Level II Equities
#1

The sustainable growth rate is the rate of dividend and earnings growth that can be sustained for a given return on equity, assuming that:

  1. No additional external capital is raised

  2. Additional debt may be raised, keeping the capital structure constant

  3. Additional equity may be raised

2nd option is the correct answer. I understand 3rd option is definitely wrong, but i picked option 1. I thought SGR only stressed on growth via internally generated funds?

Can someone please explain this?

#2

If 2 is true, 1 cannot be true. That’s why.

#3

Okay so here we are. ROE = Prof Margin * Asset Turnover * Leverage

That explains it. The latter term will dictate G

#4

as you build up retained earnings as equity, your D/E decreases. in order to stick to target D/E, you can raise extra debt under the SGR system.

#5

Understood, thanks a lot guys!