Sustainable growth is the growth a company can grow at given its profitability and reinvestment decisions without taking on additional debt. The equation for sustainable growth = Retention ratio* Return on Equity. And since the retention ratio is equal to 1- Payout ratio, sustainable growth is also = (1- Payout ratio) * Return on Equity.

We may understand what the sustainable growth rate is and its formula. The question we address on this page is how does the equation of sustainable growth rate feature in a DCF valuation?

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