If a firm does not pay dividends, what is true about the components of the sustainable growth rate?
A)The dividend payout ratio is 100%.
B)The retention ratio is 100%.
C)ROE does not equal the sustainable growth rate.
D)ROS is higher than if the firm did pay some dividends.

Question

Quizplus · Accepted Answer

If a firm does not pay dividends, then the entire profit is retained by the firm and the dividend payout ratio becomes 0%. Therefore, the retention ratio becomes 100%. ROE would still equal the sustainable growth rate because the retention ratio has increased to compensate for the lack of dividends. ROS could be higher, lower or unchanged depending on the specifics of the firm's operations.

If a Firm Does Not Pay Dividends, What Is True