The formula to calculate the Retention Ratio is:
\[ \text{Retention Ratio} = 1 - \frac{\text{Dividends Paid}}{\text{Net Income}} \]
The formula to calculate the Return on Equity (ROE) is:
\[ \text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}} \]
The formula to calculate the Sustainable Growth Rate (SGR) is:
\[ \text{SGR} = \text{Retention Ratio} \times \text{ROE} \times 100\% \]
The Sustainable Growth Rate (SGR) measures the rate at which a company can grow its sales, earnings, and dividends at a consistent rate without having to increase debt or equity. It indicates how much of the company's profit is retained and reinvested in the business.
Let's assume the following:
To calculate the Retention Ratio:
\[ \text{Retention Ratio} = 1 - \frac{1,000,000}{2,000,000} = 0.50 \]
To calculate the ROE:
\[ \text{ROE} = \frac{2,000,000}{10,000,000} = 0.20 \]
To calculate the SGR:
\[ \text{SGR} = 0.50 \times 0.20 \times 100\% = 10\% \]
Therefore, the Sustainable Growth Rate (SGR) is 10%.
