Butler, Inc.'s return on equity is 17% and management retains 75% of earnings for investment purposes. Based on this information, what will be the firm's growth rate?
A) 4.25%
B) 22.67%
C) 44.12%
D) 12.75%

Question

Quizplus · Accepted Answer

The firm's growth rate can be calculated using the formula for sustainable growth rate (SGR), which is: SGR = Return on Equity (ROE) * Retention Ratio. Given ROE is 17% and the retention ratio (the percentage of earnings retained or not paid out as dividends) is 75%, the calculation is: 0.17 * 0.75 = 0.1275 or 12.75%.