Question

ollapse QUESTION 18 A firm has a return on equity of 16 percent, a return on assets of 11 percent, and a 40 percent dividend payout ratio. What is the sustainable growth rat A 9.58 percent B10.62 percet C5.72 percent D.7.12 percent 64 percent QUESTION 19 Net working capital is defined as

Answer 1

Answer:

Return on Equity (ROE) = 16%
Retention Ratio (b) = 1 – Dividend Payout Ratio
Retention Ratio (b) = 1 – 0.40
Retention Ratio (b) = 0.60 or 60%

Sustainable Growth Rate = ROE * b/ 1 – (ROE – b)
Sustainable Growth Rate = 0.16 * 0.60 / 1 – (0.16 * 0.60)
Sustainable Growth Rate = 0.096 / 0.904
Sustainable Growth Rate = 10.62%

Option B is Correct.