If a venture has a return on assets (ROA)of 12%, an equity multiplier based on beginning equity of 3.0 times, and a sustainable growth rate of 18%, the retention rate would be:
A)60%
B)30%
C)50%
D)40%

Question

Quizplus · Accepted Answer

The retention rate can be calculated using the formula for the sustainable growth rate: Sustainable Growth Rate = ROE * Retention Rate. ROE can be found by multiplying ROA by the equity multiplier. In this case, ROE = 12% * 3 = 36%. Given the sustainable growth rate is 18%, we can rearrange the formula to find the retention rate = Sustainable Growth Rate / ROE = 18% / 36% = 0.5 or 50%.

If a Venture Has a Return on Assets (ROA)of 12