Economic Growth Model AGEC 489-689 Spring 2010. Page 50 in booklet.
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Economic Growth Economic Growth Model Model AGEC 489-689 AGEC 489-689 Spring 2010 Spring 2010
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Transcript of Economic Growth Model AGEC 489-689 Spring 2010. Page 50 in booklet.
Economic Growth ModelEconomic Growth Model
AGEC 489-689AGEC 489-689
Spring 2010Spring 2010
Page 50 in bookletPage 50 in booklet
Page 52 in bookletPage 52 in booklet
Page 53 in bookletPage 53 in booklet
Page 53 in bookletPage 53 in booklet
Know this equationKnow this equation
Economic Growth ModelEconomic Growth Model
ROE = [(r – i)L + r](1 – tx)(1 – w)
Rate of return on assets
Rate of return on assets
Cost of debt
capital
Cost of debt
capital
Leverage ratio or
debt/equity
Leverage ratio or
debt/equity
Income tax rate
Income tax rate
Rate of withdrawals
from firm
Rate of withdrawals
from firm
Economic Growth ModelEconomic Growth Model
ROE = [(r – i)L + r](1 – tx)(1 – w)
There are many applications of this model:1. Solve for ROE given r, i, L, tx and w2. Solve for required r given ROE, i, L, tx and w3. Solve for maximum w for required ROE given r, i L and tx4. Solve for maximum L for required ROE given r, i tx and w
Basically we can treat this as one equation with one unknown andsolve for that unknown value. This allows us to examine the effectsof specific internal and external constraintsinternal and external constraints on the growth of thefirm’s equity base.
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Note the use of leverage here increases the ROE…
Note the use of leverage here increases the ROE…
New set of conditionsNew set of conditions
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