After next year, the growth rate will subside to a more
sustainable 4.15% (0.12 × 0.3462).
How wouldthe answerbe different if theimprovementin
returnonequitywere onlyon newinvestmentsbut not on
existing assets? The expectedgrowth rate in earnings per
share can then be written as:
Thus,thereisnoadditionalgrowthcreatedinthiscase.What
iftheimprovementhadbeenonlyonexistingassetsandnot
on new investments? Then, the expected growth rate in
earnings per share next year can be written as:
Growth in Operating Income
Just asequity income growthis determined by the equity
reinvestedbackintothebusinessandthereturnmadeonthat
equityinvestment,youcanrelategrowthinoperatingincome
tototalreinvestmentmadeintothefirmandthereturnearned
oncapitalinvested.Weconsiderthreeseparatescenarios,and
examinehowtoestimategrowthineach,inthissubsection.
Thefirstiswhenafirmisearningastablereturnoncapital
thatitexpectstosustainovertime.Thesecondiswhenafirm
is earning a positive return on capital that is expected to
increase over time.Thethirdis themost general scenario,
whereafirmexpectsoperatingmarginstochangeovertime,
sometimes from negative values to positive levels.