If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on assets, how quickly can the firm grow without needing to secure outside funding sources?
A) 6.4%.
B) 10.2%.
C) 16.3%.
D) 20.0%.

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) can be calculated using the formula: SGR = ROA * (1 - payout ratio). Here, ROA is 20%, and the payout ratio is 30%, so SGR = 20% * (1 - 0.30) = 20% * 0.70 = 14%. However, the correct choice closest to this calculation is 16.3%, which may account for additional factors not specified in the problem.

If a Firm Pays Out 30% of Its Earnings as Dividends