If ROE is 25% and the retention ratio is 0.6, what is the sustainable growth rate g?

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Multiple Choice

If ROE is 25% and the retention ratio is 0.6, what is the sustainable growth rate g?

Explanation:
Sustainable growth rate shows how fast a company can grow using only its own generated funds. It is calculated with g = ROE × retention ratio, reflecting how much of earnings are reinvested and the return those reinvested funds earn on equity. With ROE of 25% and a retention ratio of 0.6, g = 0.25 × 0.6 = 0.15, or 15%. This assumes ROE and the retention rate stay constant and no new external equity is issued. The other options don’t fit because they would require either a higher retention than available (e.g., 40% would need a retention of 1.0 if ROE were 25%), or a change in ROE, which isn’t given.

Sustainable growth rate shows how fast a company can grow using only its own generated funds. It is calculated with g = ROE × retention ratio, reflecting how much of earnings are reinvested and the return those reinvested funds earn on equity.

With ROE of 25% and a retention ratio of 0.6, g = 0.25 × 0.6 = 0.15, or 15%. This assumes ROE and the retention rate stay constant and no new external equity is issued.

The other options don’t fit because they would require either a higher retention than available (e.g., 40% would need a retention of 1.0 if ROE were 25%), or a change in ROE, which isn’t given.

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