Proceedings Volume Cover
✎  
THE INFLUENCE OF PROJECT PROFITABILITY  
ON COMPANY GROWTH  
✎✌  
.
BY  
‘F., BRONSANDM. SILBERGH  
.
,.  
.
,,  
The financial structure of a large company is-quite complex. We are  
able, however, to follow the trend of s;ch elements as the annual net cash  
“‘  
,‘  
,.  
;—.  
income I (which is the income after paying all costs, including over”$ead and taxes),  
the annual net profit P (which is the annual net cash income minus writeoffs) and  
.
Other characteristics  
of a company, such as the average  
‘ .+  
..  
the dividend paip out.  
annual earning power i and the market value V, are not readily detectable but are :  
related in some manner to tho aforementioned elements.  
In an attempt to es@blish mathematical relationships between the various ~”  
,-  
-
elements a simple model of a company (Figure 1) was-studied, This model starts  
✿✎  
,.,  
with an investment of $+000 in a project which yields $400 annually for three years.  
(It is assumed in the model th&4the incomes are received at the end of each year. )  
.>  
From thedefihtion of earning power, present ~lue’ i+ome disco~ted  
at eaq~g  
,.  
= .’  
= 1000, the deferment factor D? is fm.nd  
power i equals investment, or Di (1200}  
to be 0.83.. Using deferment factor tables, the value of the earning power i of  
.”.,  
✎  
All incomes derived flom” the first. invest-  
rnent are reinvested-’ in projects with the same ‘characteristics as the first  
DThe annual cash income first shows  
thiq project is found-to be 10 percent.  
:Jl  
(i.= 10 percent,. three year constant iqcome),  
an irregu~ar trend but, as shown in the top curve of Figure 2, after some tip?e  
this trend stabilizes and the growth rate-of I becomes. condmt.. For. complQte  
-,  
.....  
...  
,
...  
reinvestment ofcash incomes the following- important relatiomis true.  
growth r~t~ g = earning power i.  
-
(1)  
Ifj however, as shown in the lower curve of ‘Figur~ 2, seven percent of I is paid  
.“  
~
.—-.-..L.-.+,... <  
.-.=:-....  
.... ..=.. .==.–=-r.=.-.-.: .~-....-  
... _.&_.A.–—_L:=__-..-=.  
.. .. ...= “. ...__. ..=.-._.L*. .  
.. ..,.,.=.i=.–..-A._---.  
out as dividend, then the reinvestment ratio b is 0.93 ~} although:~~ cas!  
income od’ter stabiliza~ion obt”a~s a Cinstant growth rate g} ihi~ rate iS .le.ss than  
~..  
-:  
,
-,,  
1000  
-,  
‘FFb%~““’=1”%  
Di=O. B3  
li” -k 560  
400  
I
\.  
160  
224  
...,  
-L  
314--twl  
314  
-
224  
i
280  
.%  
818  
.;. .  
L-1  
i,  
! 314 ! 280  
929!  
! 327 &++:  
..  
280  
h“  
327  
3727  
Q79  
i
4
1- “-” ‘-: “-*H  
!.  
.
;;  
t“  
->  
.. ,  
J,  
,.  
.
..”  
/-  
.-  
.,  
..  
L.<  
.1  
,, -  
.
. .  
.
.
~..,+._.=___  
.
“..=  
..-  
..—_...._. ...,-,.-.. .... .... .,. —... - . ...-.%  
-.  
,,  
--l  
\
I
.
...  
.-.  
.
..  
.
.
..  
✎✎  
✎  
. .  
✎✍✎