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%.
E)none of the above.

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is:
Sustainable growth rate = (retention rate × return on assets)
The retention rate is (1 - dividend payout ratio) which is (1-0.30) = 0.70
Return on assets is 20%
Sustainable growth rate = (0.70 × 20%) = 14%
Therefore, the firm can grow at a maximum rate of 14% without needing to secure outside funding sources. Option C is closest to this answer.

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