Question

The Crash Davis Driving School has an ROE of 16.9 percent and a payout ratio of 68 percent.

What is its sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Sustainable growth rate             %

Answer 1

Sustainable Growth Rate

Sustainable Growth Rate is calculated by using the following formula

Sustainable Growth Rate = [ROE x b)] / [1- (ROE x b)]

ROE = 16.90%

Retention Ratio (b) = 0.32 (1 – 0.68)

Therefore, the Sustainable Growth Rate = [ROE x b)] / [1- (ROE x b)]

= [0.1690 x 0.32] / [1 – (0.1690 x 0.32)]

= 0.05408 / [1 - 0.05408]

= 0.05408 / 0.94592

= 0.0572

= 5.72%

“Hence, the Sustainable Growth Rate = 5.72%”