growth rate

Examples of growth rate in the following topics:

• Expected Dividends and Constant Growth

  • Valuations rely heavily on the expected growth rate of a company; past growth rate of sales and income provide insight into future growth.
  • Valuations rely very heavily on the expected growth rate of a company.
  • One must look at the historical growth rate of both sales and income to get a feeling for the type of future growth expected.
  • Calculating the future growth rate requires personal investment research.
  • It assumes that dividends will increase at a constant growth rate (less than the discount rate) forever.

• Assessing Internal Growth and Sustainability

  • What is its sustainable growth rate?
  • Sustainable Growth Rate = (750,000/5,000,000) x (1-0.80).
  • Sustainable Growth Rate = 3%
  • The internal growth rate is a formula for calculating maximum growth rate that a firm can achieve without resorting to external financing.
  • Therefore, a more commonly used measure is the sustainable growth rate.

• Relationships between ROA, ROE, and Growth

  • What is the company's ROA and internal growth rate?
  • What is the company's ROE and sustainable growth rate?
  • ROA = 500,000/3,000,000 = 17% Internal growth rate = 17% x 80% = 13% ROE = 17% x (3,000,000/1,500,000) = 34% Sustainable growth rate = 34% x 80% = 27.2%
  • In terms of growth rates, we use the value known as return on assets to determine a company's internal growth rate.
  • This is the maximum growth rate a firm can achieve without resorting to external financing.

• Valuing Nonconstant Growth Dividends

  • When a stock has a significantly higher growth rate than its peers, it is sometimes assumed that the earnings growth rate will be sustained for a short time (say, 5 years), and then the growth rate will revert to the mean.
  • To do this, one takes the average P/E and average growth for a comparison index, uses the current (or forward) P/E of the stock in question, and calculates what growth rate would be needed for the two valuation equations to be equal.
  • This gives you an estimate of the "break-even" growth rate for the stock's current P/E ratio.
  • Subsequently, one can divide this imputed growth estimate by recent historical growth rates.
  • Describe the limitations of valuing a company with dividends that have a nonconstant growth rate

• The Cost of Preferred Stock

  • The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the expected growth rate.
  • The growth rate is expected to be 3%..
  • Similar to bonds, preferred stocks are rated by the major credit rating companies.
  • This tells us that the cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the expected growth rate.
  • The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the growth rate.

• Calculating Perpetuities

  • The PV is simply the payment size (A) divided by the interest rate (r).
  • It is also possible that an annuity has payments that grow at a certain rate per period.
  • The rate at which the payments change is fittingly called the growth rate (g).
  • It is essentially the same as in except that the growth rate is subtracted from the interest rate.
  • Another way to think about it is that for a normal perpetuity, the growth rate is just 0, so the formula boils down to the payment size divided by r.

• Disinflation

  • Disinflation is a decrease in the inflation rate; a slowdown in the rate of increase of the general price level of goods, services.
  • Disinflation is a decrease in the rate of inflation–a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time.
  • Again, if the current rate is 1% and it is -2% for the following month, prices disinflated by 3% (i.e., 1%-[-2]%) and are decreasing at a 2% annual rate.
  • The causes of disinflation are either a decrease in the growth rate of the money supply, or a business cycle contraction (recession).
  • When the growth rate of unemployment is below the natural rate of growth, this leads to an increase in the rate of inflation; whereas, when the growth rate of unemployment is above the natural rate of growth it leads to a decrease in the rate of inflation also known as disinflation.

• Relationship Between Dividend Payments and the Growth Rate

  • The portion of the earnings not paid to investors is, ideally, left for investment in order to provide for future earnings growth.
  • These companies also provide limited growth opportunities, since earnings are not reinvested for the purpose of growth.
  • On the other hand, some companies can retain earnings and put that money back to work - i.e., invest in growth opportunities.
  • Put succinctly, investors seeking high current income and limited capital growth prefer companies with a high dividend payout ratio.
  • However, investors seeking higher capital growth may prefer a lower payout ratio because capital gains are taxed at a lower rate.

• Time Lags and Targets

  • The Fed uses its tools to influence the intermediate targets, and the intermediate targets directly affect the price level, unemployment rate, and economic growth rate.
  • When the Fed implements monetary policy, such as a creating a greater GDP growth rate, the Fed's policy immediately affects the operating targets, and, in turn, influence the intermediate targets, such as GDP growth rate.
  • For example, the Fed can influence the money supply, but not the GDP growth rate.
  • Many factors influence the GDP growth rate, and the Fed cannot influence all of them.
  • U.S. dollar exchange rate: Exchange rates can predict inflation and real GDP growth rate.

• Macroeconomic Factors Influencing the Interest Rate

  • Taylor explained the rule of determining interest rates using three variables: inflation rate, GDP growth, and the real interest rate.
  • An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender in the market.
  • In this equation, it is the target short-term nominal interest rate (e.g., the federal fund rates in the United States), πt is the rate of inflation as measured by the GDP deflator, π*t is the desired rate of inflation, r*t is the assumed equilibrium real interest rate, yt is the logarithm of real GDP, and y*t is the logarithm of potential output, as determined by a linear trend.
  • If this calculation yields a positive number, it is called an "inflationary gap" and indicates the growth of aggregate demand is outpacing the growth of aggregate supply (or high level of employment), possibly creating inflation, signaling an increase in interest rates made by the Central Bank; if the calculation yields a negative number it is called a "recessionary gap," which is accompanied by a low employment rate, possibly signifying deflation and a reduction in interest rates.
  • Taylor explained the rule in simple terms using three variables: inflation rate, GDP growth, and the equilibrium real interest rate.