If a firm does not have any debt, what is true about the components of the sustainable growth rate?
A)The retention ratio is 100%.
B)The dividend payout ratio is 100%.
C)The ROA multiplied by the retention ratio is equal to the sustainable growth rate
D)The ROE is greater than the ROA.

Question

Quizplus · Accepted Answer

If a firm does not have any debt, then its sustainable growth rate is solely determined by its earnings retention ratio (RR). The RR is equal to 1, as the firm retains all of its earnings since there are no debt obligations that require payment. Therefore, the equation for the sustainable growth rate simplifies to: ROA x RR = ROA x 1 = ROA.

If a Firm Does Not Have Any Debt, What Is