A firm that wants to increase its sustainable growth rate can do so by __________ the __________ ratio or by __________ the __________,or both.

Question

Quizplus · Accepted Answer

The sustainable growth rate can be increased by increasing the plowback ratio (the portion of earnings that are reinvested back into the company) and by increasing the return on equity (ROE). Choice A, increasing the payout ratio (the portion of earnings paid out as dividends), would have the opposite effect and decrease the plowback ratio. Choice C, decreasing the plowback ratio, would also have the opposite effect. Choice D, decreasing the payout ratio, could increase the plowback ratio, but decreasing the ROE would have a negative impact on the sustainable growth rate. Therefore, the best choice is B, which focuses on increasing the plowback ratio and ROE.

A Firm That Wants to Increase Its Sustainable Growth Rate