Final answer:
Increasing the plowback ratio or decreasing the required return should increase a firm's sustainable growth rate, as this allows for greater reinvestment in the company's operations and reduces the hurdle for investment opportunities, respectively.
Step-by-step explanation:
The question asks which of the following options should increase a firm's sustainable growth rate. To answer the question, we need to consider the impact of each option on the firm's ability to grow sustainably over time.
An increase in the plowback ratio, which is the proportion of earnings retained by the company after dividends are paid, should increase the firm's sustainable growth rate. This is because retaining more earnings allows the firm to reinvest in its operations, potentially leading to higher future profits and growth. In contrast, decreasing the return on equity (ROE) or increasing the dividend payout ratio would typically reduce the amount of funds available to reinvest in the business, thus likely slowing down growth. Lastly, decreasing the required return can also facilitate a higher sustainable growth rate because it reduces the hurdle for investment opportunities, potentially boosting growth through more reinvestment.
Therefore, the firm should increase the plowback ratio or decrease the required return to enhance its sustainable growth rate.