Question

The Crash Davis Driving School has an ROE of 13.7 percent and a payout ratio of 36 percent. What is its sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Sustainable growth rate %

Answer 1

8.77%

Step-by-step explanation:

Sustainable growth rate (SGR) % = The maximum rate of growth that a company can sustain without having to finance growth with additional equity or debt. It can be calculated by multiplying a company's retention rate by its return on equity. The payout ration is the proportion of earnings that the company pays out as dividends. Retention rate is the proportion of earnings retained in the company for investment. The formula used to calculate the SGR is ROE * (1 - payout ratio)

= 13.7% * ( 1 - 36%) = 0.08768 = 8.77%