Three Ways To Find Growth Rate
Written by: Christopher J. Farrugia
Print This Tutorial 
Email This TutorialThere are a number of cases where you will need to find the growth rate for a firm. This tutorial teaches you how to find that growth rate in three easy ways.
There are three different ways to get the growth rate, g. The first way is that it will simply be given to you in the problem. Easy enough! The second way to find growth is to use the equation:
In this equation, ROE is the return on equity which will be given to you in the problem. The lowercase r is the retention rate. Remember before when we said that companies have two options with their net income? They can either pay a dividend or retain the money for themselves. The percentage that they keep for themselves is their retention rate or r in our equation. Let's try a quick practice problem to illustrate this point.
Practice Problem 1--Finding The Growth Rate
Busboy Corporation has a return on equity of 18% and pays out 40% of their net income in the form of a dividend. What is Busboy Corporation's growth rate?
Solution
The problem tells us that ROE is 18%. They tell us that they pay out 40% of net income as a dividend. If they pay out 40%, they must retain the rest! So we know that r is 60%. So to find growth, our equation looks like:
In our practice problem, we find that growth equals 10.8%.
The third and final way to find growth is by using the time value of money. If you're unfamiliar with the time value of money, this simple tutorial on present value vs. future value will help quite a bit. To better illustrate this point, let's try another problem.
Practice Problem 2--Finding Growth Through Time Value of Money
File Incorporated paid a dividend of $2.18 nine years ago. The firm recently paid a dividend of $4.36. What is File Inc.'s growth rate?
Solution
Take a look at this problem on a timeline.
When using the time value of money to find the growth rate, we just solve for the interest. In this example, we set the present value to -$2.18, the future value to $4.36, n=9, and we solve for I. You'll get 8% if all went well. That's our growth rate!
So that's it! Growth will either be given to you explicitly in the problem, or you can calculate it yourself using the return on equity equation or the time value of money. If you're still somewhat foggy on this tutorial or you need some additional help, please post a message to our forums.