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 %

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

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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.

Step 1: Identify Given Values

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%).

Step 2: Apply the Sustainable Growth Rate Formula

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

Step 3: Perform the Calculation

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

Step 4: Convert to Percentage

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

Final Answer

\(\boxed{13.60\%}\)

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