Question

Last year Rain Repel Corporation had an ROE of 10 percent and a dividend payout ratio of 80 percent. What is the sustainable growth rate?

A. 1.11 percent
B. 2.04 percent
C. 44.44 percent
D. 50.00 percent

Answer 1

The sustainable growth rate for Rain Repel Corporation with an ROE of 10 percent and a dividend payout ratio of 80 percent is 2 percent, the closest answer to the calculated value is B. 2.04 percent.

Step-by-step explanation:

The sustainable growth rate is the rate at which a company can grow its sales, earnings and dividends without borrowing new funds or issuing new equity. It is calculated using the formula:

Sustainable Growth Rate (SGR) = ROE × (1 - dividend payout ratio)

For Rain Repel Corporation, with a return on equity (ROE) of 10 percent and a dividend payout ratio of 80 percent, the calculation is as follows:

SGR = 0.10 × (1 - 0.80)

SGR = 0.10 × 0.20

SGR = 0.02 or 2.00 percent.

Thus, the answer closest to the calculation is B. 2.04 percent.