Question

Assume the Crash Davis Driving School has a 13.1 percent ROE and a 30 percent payout ratio. Required: What is the sustainable growth rate?

Answer 1

Answer:

9.17%

Explanation:

sustainable growth rate = return on equity x retention rate

• return on equity = 13.1%
• retention rate = 1 - payout rate = 1 - 30% = 0.7

sustainable growth rate = 13.1% x 0.7 = 9.17%

A company's sustainable growth rate is the growth rate that the company can achieve without raising new capital either by issuing debt or stocks. It basically refers to how much the company can finance its current or future projects by investing its retained earnings.