Problem: There is only one growth rate that is consistent with the preceding assumptions. In effect with these assumptions, growth has been made a plug variable. To see this, recall that a Change in assets = change in debt and change in equity. What does it mean? How does it relate to a company's financial planning? (word count > 75)
Change in assets = Change in debt + Change in equity
Now we can write the conditions that ensure this equality and solve for the growth rate that will give it to us.
The variables used in this demonstration are the following:
T _ The ratio of total assets to sales
p _ The net profit margin on sales
d _ The dividend-payout ratio
L _ The debt-equity ratio
S0 _ Sales this year
_S _ The change in sales (S1 _ S0 __S)