Which action would increase the sustainable growth rate (g) assuming ROE remains constant?

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Multiple Choice

Which action would increase the sustainable growth rate (g) assuming ROE remains constant?

Explanation:
The key idea is how fast a company can grow using only internal funds. The sustainable growth rate is g = ROE × retention ratio (b). If ROE stays the same, then g moves directly with the amount you keep and reinvest as earnings. Increasing the retention ratio means more earnings are retained rather than paid out as dividends, so more funds are available to reinvest in the business. This boosts the growth of equity and assets without needing new external financing, raising g. For example, if ROE is 15% and you raise the retention ratio from 0.4 to 0.6, g goes from 6% to 9%. Decreasing retention would reduce g, and changing debt or ROE while keeping ROE constant doesn’t affect g through this formula.

The key idea is how fast a company can grow using only internal funds. The sustainable growth rate is g = ROE × retention ratio (b). If ROE stays the same, then g moves directly with the amount you keep and reinvest as earnings. Increasing the retention ratio means more earnings are retained rather than paid out as dividends, so more funds are available to reinvest in the business. This boosts the growth of equity and assets without needing new external financing, raising g. For example, if ROE is 15% and you raise the retention ratio from 0.4 to 0.6, g goes from 6% to 9%.

Decreasing retention would reduce g, and changing debt or ROE while keeping ROE constant doesn’t affect g through this formula.

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