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How do you calculate the growth rate of a firm and industry?
AUJT110075
The growth rate is the maximum possible rate with only with internal financing. The growth rate of a firm can be calculated with the following equation:
internal
Growth rate = (ROA x b) / (1 - ROA x b)
Here,
ROA = net income / total assets
B (retention rate) = retained earnings / net earnings.
Example: The following information is related to firm ABC
Net income $180
total assets $1,350
retained income $100
Step # 1:
Find the ROA and b (retention rate).
ROA = net income / total assets
ROA = $180 / $1,350
ROA = 0.13 OR 13%
b (retention rate) = retained earnings / net income.
b = $100/$180
b = .55 OR 55%
Step # 2:
By putting the information in growth formula
Growth rate = (ROA x b) / (1 - ROA x b)
Growth rate = (0.13 x 0.55)/(1 - 0.13 x0.55)
Step #3:
Solution:
Growth rate = (0.13 x 0.55)/(1 - 0.13 x 0.55)
= 0.0715 / (1 - 0.0715)
= 0.0715 / 0.9285
Growth rate = 0.077005924
So, growth rate of firm ABC is 7.7%.
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