Question

Exelon has a 18 percent return on equity and a 40 percent retention ratio. What is the sustainable growth rate (under constant debt/equity)?

Answer 1

The sustainable growth rate formula is ROE * Retention Ratio. In this case, Exelon has an 18 percent ROE and a 40 percent retention ratio, resulting in a sustainable growth rate of 7.2 percent.

Step-by-step explanation:

The sustainable growth rate of a company can be calculated using the return on equity (ROE) and the retention ratio. The sustainable growth rate formula is:

Sustainable Growth Rate = ROE * Retention Ratio

In this case, the ROE is 18% (or 0.18) and the retention ratio is 40% (or 0.40). The sustainable growth rate formula is ROE * Retention Ratio. In this case, Exelon has an 18 percent ROE and a 40 percent retention ratio, resulting in a sustainable growth rate of 7.2 percent.

Therefore, the sustainable growth rate under constant debt/equity is:

Sustainable Growth Rate = 0.18 * 0.40 = 0.072 or 7.2%