Marcie's Mercantile wants to maintain its current dividend policy,which is a payout ratio of 40%. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements,the maximum rate at which Marcie's can grow is equal to:
A) 40% of the internal rate of growth.
B) 60% of the internal rate of growth.
C) the internal rate of growth.
D) the sustainable rate of growth.
E) 60% of the sustainable rate of growth.

Question

Quizplus · Accepted Answer

The sustainable rate of growth is the rate at which a company can grow using only internal financing (retained earnings) while maintaining a constant debt-equity ratio. Since Marcie's wants to maintain its current debt-equity ratio, the maximum rate at which it can grow is the sustainable rate of growth. Therefore, the correct answer is D. Choice A and B are incorrect because the internal rate of growth takes into account both retained earnings and new external financing, which Marcie's does not want to increase. Choice C is incorrect for the same reason as choices A and B. Choice E is incorrect because it incorrectly applies the 60% factor to the sustainable rate of growth rather than the internal rate of growth.

Marcie's Mercantile Wants to Maintain Its Current Dividend Policy,which Is