A firm has a debt equity ratio of 1/3, and plans to grow at an annual rate of 10%.Its return on equity is 18%.What is the maximum payout ratio that a company can maintain without resorting to new equity issue?

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated as ROE * (1 - payout ratio). Given the growth rate is 10% and ROE is 18%, we solve for the payout ratio: 0.10 = 0.18 * (1 - payout ratio). Solving this gives a payout ratio of approximately 26%.

A Firm Has a Debt Equity Ratio of 1/3, and Plans