Questions: If the CDD School has an ROE of 17 percent and a payout ratio of 20 percent, what is its sustainable growth rate? 11.74 % 13.74 % 15.74 % 17.74 %

Solution Steps

To find the sustainable growth rate, we use the formula:
\[ \text{Sustainable Growth Rate} = \text{ROE} \times (1 - \text{Payout Ratio}) \]
Given that the ROE is 17% and the payout ratio is 20%, we can substitute these values into the formula to calculate the sustainable growth rate.

We are given the Return on Equity (ROE) and the payout ratio. Specifically, the ROE is \(0.17\) (or 17%) and the payout ratio is \(0.20\) (or 20%).

The formula for the sustainable growth rate is: \[ \text{Sustainable Growth Rate} = \text{ROE} \times (1 - \text{Payout Ratio}) \] Substituting the given values: \[ \text{Sustainable Growth Rate} = 0.17 \times (1 - 0.20) \]

Calculate the term inside the parentheses: \[ 1 - 0.20 = 0.80 \] Now, multiply by the ROE: \[ 0.17 \times 0.80 = 0.136 \]

Convert the sustainable growth rate to a percentage by multiplying by 100: \[ 0.136 \times 100 = 13.60\% \]

Final Answer