US CMA Part 2 · Chapter 2 · Question 10 of 15
Upton Devices has a return on equity of 16% and a dividend payout ratio of 35%. Assuming it maintains its capital structure and these ratios, what is its sustainable growth rate?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 10.4%
Explanation
Sustainable growth rate = ROE x retention ratio. Retention ratio = 1 - payout = 1 - 35% = 65%. Sustainable growth = 16% x 65% = 10.4%. Multiplying ROE by the payout ratio (5.6%) uses the share of earnings paid out rather than reinvested.
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