Question

The Wintergrass Company has an ROE of 15 percent and a payout ratio of 40 percent. What is the company’s sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

We know that,

Sustainable growth rate= Return on equity * Retention rate

In the given problem,

ROE=15%

Payout ratio= 40%

So, Retention rate= 100- Payout ratio= (100-40)%= 60%

Putting the same in the above mentioned formula we get,

Sustainable growth rate= 15% * 60% = 9%