Question

The Crash Davis Driving School has an ROE of 14.5 percent and a payout ratio of 44 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

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.44
Retention Ratio, b = 0.56

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
Sustainable Growth Rate = [0.145 * 0.56] / [1 - 0.145 * 0.56]
Sustainable Growth Rate = 0.0812 / 0.9188
Sustainable Growth Rate = 0.0884 or 8.84%