What effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70% to 40% if the firm has an ROE of 20%?
A)The growth rate can increase from 6% to 10.5%.
B)The growth rate can increase from 6% to 12%.
C)The growth rate can increase from 8% to 14%.
D)The growth rate can increase from 11% to 14%. current growth rate in earnings = plowback ratio x ROE = .3 x .2 = 6%

Question

Quizplus · Accepted Answer

Decreasing the dividend-payout ratio from 70% to 40% would increase the plowback ratio from 30% to 60% (100% - 40% dividend payout). Using the formula for sustainable growth rate, the new growth rate can be calculated as plowback ratio x ROE = 0.6 x 0.2 = 12%. This is an increase from the original growth rate of 6%. Therefore, the growth rate can increase from 6% to 12%.

What Effect on the Growth Rate of Earnings Can Be