Chapter 4
2. Quoting from the chapter, “Good growth occurs when the company invests in activities
offering returns in excess of cost, including the cost of capital employed. Good growth benefits
4. a. R&E Supplies, Inc., Sustainable Growth Calculations
2011
2012
2013
2014
2015F
Profit margin (P) (%)
3.3
2.9
2.4
1.4
0.6
Retention ratio(R) (%)
50.0
50.0
50.0
50.0
50.0
Asset turnover (A) (times)
3.4
3.6
3.2
3.5
3.3
Financial leverage (
T
) (times)
NA.
3.2
3.6
3.7
4.5
R&E’s Sustainable growth rate (g*) (%)
—
16.7
13.8
9.2
4.5
R&E’s Actual growth rate (g) (%)
—
23.0
17.0
28.0
25.0
b. R&E’s actual growth rate is well in excess of its sustainable growth rate. Its growth
c. R&E has coped with its growth problems quite poorly. The profit margin has fallen,
contributing to a sizable reduction in sustainable growth. Dividends continue to consume
d. There are several possibilities. First, I would work hard to get the profit margin back up to
a reasonable level. This might involve raising prices. Second, I would prune out all slow-
6. There is an upward trend in gross public equity issues for U.S. corporations in the last 30 years,
with the exception of the recent sharp recession. This is not necessarily a contradiction to
Figure 4.5. Figure 4.6 shows that U.S. companies are issuing more equity today than they did
8. a. Genentech’s sustainable growth rates are
2003
2004
2005
2006
2007
Sustainable growth rate (%)
10.6
12.0
19.0
28.6
29.3
b. Genentech’s challenge over this period was to manage its rapid growth rate. Actual growth
were similar in 2007.
c. How did Genentech cope with this challenge? The company increased every ratio in
d. We can answer these “what if” questions by substituting the assumed ratio value for the
actual value in 2007, Genentech’s revised sustainable growth rates are as follows:
Asset turnover = 0.72 times Sustainable growth = 34.0%
10. See Excel solutions at mhhe.com/higgins11e.