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Suppose a company’s ROE is 16%. This company’s payout ratio is 40%. The required rate of
return on the stock is 15%. What is the sustainable growth rate of this company?
Solution
Retention ratio=1-payout ratio
=1-0.4
=0.6
Sustainable growth rate=(ROE*Retention ratio)/[1-(ROE*Retention ratio)]
=(0.16*0.6)/[1-(0.16*0.6)]
which is equal to
=10.62%(Approx).

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Suppose a company’s ROE is 16. This company’s payout ratio is 40. .pdf

  • 1. Suppose a company’s ROE is 16%. This company’s payout ratio is 40%. The required rate of return on the stock is 15%. What is the sustainable growth rate of this company? Solution Retention ratio=1-payout ratio =1-0.4 =0.6 Sustainable growth rate=(ROE*Retention ratio)/[1-(ROE*Retention ratio)] =(0.16*0.6)/[1-(0.16*0.6)] which is equal to =10.62%(Approx).