Question

If the Crash Davis Driving School has an ROE of 14.5 percent and a payout ratio of 30 percent.

Required:
What is its sustainable growth rate?

Answer 1

To find the sustainable growth rate we need the plowback, or retention, ratio. The plowback ratio is:b= 1 – Payout ratio, b= 1 – .30, b= ..70

Now, we can use the sustainable growth rate equation to find:Sustainable growth rate = [(ROE)(b)] / [1 – (ROE)(b)]Sustainable growth rate = [.145(.70)] / [1 – .145(.70)]

Sustainable growth rate = 10.15% /(1-10.15%)

Sustainable growth rate = 11.30%