Which of the following should increase the firm's sustainable growth rate?

Question

Quizplus · Accepted Answer

The sustainable growth rate is a function of the plowback ratio (percentage of earnings reinvested back into the business) and ROE (Return on Equity). Therefore, increasing the plowback ratio should increase the sustainable growth rate as long as the firm is able to generate a sufficient ROE to justify the reinvestment. Increasing the dividend payout ratio would decrease the plowback ratio, and decreasing the ROE would decrease the overall ability of the firm to generate earnings for future reinvestment. Decreasing the required return may have some effect on the growth rate, but it is not as clear cut as increasing the plowback ratio.

Which of the Following Should Increase the Firm's Sustainable Growth