Question

The Crash Davis Driving School has an ROE of 13.3 percent and a payout ratio of 32 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

Answer:

sustainable growth rate for Crash Davis Driving School:  9.044%

Explanation:

$growth = ROE \times (1 - dividends payout ratio)$

0.133 x (1-0.32) = 0.09044

The firm will grow as the amount that isn't paid as dividends increase the equity through retained earnings. Because both, common sense the acounting equaition if the earnings are retained they will be investment and assets will increase:

Assuming the company thakes no debt for the period then:

Assets = liab + equity

Assets = 0   +  increase in RE

Assets = + increase in RE

Thus, this is the rate at which assets grows without taking new debt