Suppose a companys ROE is 16 This companys payout ratio is 4

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).