Genentech Inc. is a California-based biotech pioneer recently acquired by Swiss
ID: 2760532 • Letter: G
Question
Genentech Inc. is a California-based biotech pioneer recently acquired by Swiss pharmaceutical giant Roche Holding AG. Roche paid $46.8 billion in cash for the 44 percent of Genentech it did not already own, implying a market value of over $100 billion for the entire company. For a look at Genentech's recent sustainable growth challenges, consider the following selected financial data. Calculate Genentech's annual sustainable growth rate for the years 2003-2007. Did Genentech face a growth management challenge during this period? Please explain briefly. How did Genentech cope with this challenge? Calculate Genentech's sustainable growth rate in 2007 assuming an asset turnover of 0.72 times. Calculate the sustainable growth rate in 2007 assuming a financial leverage of 2.20 times. Calculate the sustainable growth rate in 2007 assuming both of these changes occur.Explanation / Answer
To calculate the sustainable-growth rate for a company, you need to know how profitable the company is as measured by its return on equity (ROE). You also need to know what percentage of a company's earnings per share is paid out in dividends, which is called the dividend-payout ratio. From there, multiply the company's ROE by its plowback ratio, which is equal to 1 minus the dividend-payout ratio. Sustainable-growth rate = ROE x (1 - dividend-payout ratio).
therefore in this case, Payout ratio is nil, hence ROE = SGR(Suatainable growth rate).
(ii)Creation of sustainable growth is a prime concern of small business owners and big corporate executives alike. Obviously, however, achieving this goal is no easy task, given rapidly changing political, economic, competitive, and consumer trends. Each of these trends presents unique challenges to business leaders searching for the elusive grail of sustainable growth. Customer expectations, for example, have changed considerably over the last few generations. Modern consumers have less disposable wealth than their parents, which makes them more discriminating buyers. This fact, coupled with the legacy of a decade of quality and cost reduction programs, means that companies must try to attract customers by redefining value and keep those customers by beating their competitors in enhancing value. Similarly, competition is keen in nearly all industries, which have seen unprecedented breakdowns in the barriers that formerly separated them.
(iii)The concept of sustainable growth can be helpful for planning healthy corporate growth. This concept forces managers to consider the financial consequences of sales increases and to set sales growth goals that are consistent with the operating and financial policies of the firm. Often, a conflict can arise if growth objectives are not consistent with the value of the organization's sustainable growth.
According to economists, if a company's sales expand at any rate other than the sustainable rate, one or more of the basic business ratios must change. If a company's actual growth rate temporarily exceeds its sustainable rate, the required cash can likely be borrowed. When actual growth exceeds sustainable growth for longer periods, management must formulate a financial strategy from among the following options: 1) sell new equity; 2) permanently increase financial leverage (i.e, take on more debt); 3) reduce dividends; 4) increase the profit margin; or 5) decrease the percentage of total assets to sales.
(iv)G* = Earnings Retention × Asset Utilization × Profitability × Financial Leverage.
= 1.00*.72*.236*2.2
=37.38%
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