If a firm’s revenue growth is 25 percent, its return on equityis 12 percent, its...

If a firm’s revenue growth is 25 percent, its return on equity is 12 percent, its return on business assets is 10 percent, and its dividend payout ratio is 40 percent, what is its sustainable growth rate?

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Expert Solution

The sustainable growth rate is computed as shown below:

= (ROE x b) / [ (1 - (ROE x b) ]

b is computed as follows:

= 1 - dividend payout ratio

= 1 - 0.40

= 0.60

So, the rate will be as follows:

= (0.12 x 0.60) / (1 - 0.12 x 0.60)

= 0.072 / 0.928

= 7.76%

jeff jeffy answered 2 years ago

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