What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%?
A) 8%
B) 12%
C) 20%
D) 40%

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated as ROE multiplied by the retention ratio (b). Given SGR = 8% and ROE = 20%, we have 0.08 = 0.20 * b. Solving for b gives b = 0.08 / 0.20 = 0.40, or 40%.

What Proportion of Earnings Is Being Plowed Back into the Firm