SS 11, Reading 41, Q #8 , CFAI Book4 pg. 340 Part B asks to calculate the share price of the company using the DDM. The question specifies that the company’s sales are growing at a constant 7% rate. The solution states that 7% should be used as the sustainable growth rate. From my understanding sales growth does not necessarily equal the sustainable growth rate (ROE x RR). Could someone explain the logic behind this concept? This Q makes me feel like a noob.
Yeah it is not always the case that they are the same. But in the long term sales growth should equal the sustainable growth rate. In any case, the ROE is not given here so the best you can do is to use the growth in sales.