Hello, What is the biggest challenge to sustainability? Achieving SGR is the goal of every company, but some headwinds can prevent a business from growing and achieving its optimal SGR. Consumer trends can cause a business to achieve sustainable growth or miss it altogether. Modern consumers have less disposable income and are traditionally more conservative with spending, making those discriminating buyers.
What are the Barriers to the Attainment of Sustainable development?
Companies compete for the business of these customers by lowering prices and potentially reducing growth. Companies also invest money in new product development to try to keep existing customers, which may cut the company’s ability to grow and gain SGR.
Another factor that detracts from the company’s ability to achieve sustainable growth is in its planning capacity. Many companies confuse development strategy with growth potential. And misses the optimal SGR. When this happens, a company can achieve high growth in the short term but will not sustain it long term.
There are cases when the growth of a company exceeds self-fund. In these cases, the company must formulate a financial strategy that sells more equity, increases financial leverage through debt, reduces dividend payouts, increases profit margins, or decreases assets to sales ratios. Any of these factors can increase SGR to higher levels.
Example: Stark Industries’ earnings before interest and taxes for the financial year 2011 amounted to $5,130 million. The applicable tax rate is 35%. 60% of the company’s assets are financed by debt which has an after-tax cost of 3.8%, while 40% is financed by equity with a cost of 9.8%. Stark Industries average total capital employed over the period amounted to $50,420 million. Find Stark Industries’ economic value added.
Economic Value Added = NOPAT − WACC × Capital Employed
NOPAT = EBIT × (1 − Tax Rate) = $5,130 million × (1 − 35%) = $3,334 million
WACC = 0.6 × 3.8% + 0.4 × 9.8% = 6.2%
Economic Value Added = $3,334 million − 6.2% × $50,420 = $208 million
This tells us that over the financial year 2011, Stark Industries added a total of $208 million to its value.
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