USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 65 percent when the rate on long-term government bonds falls to 8 percent. Because investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 9.1. What is the expected sustainable growth rate?
A) 2.80 percent
B) 4.20 percent
C) 5.25 percent
D) 7.80 percent
E) 9.75 percent

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated using the formula: Sustainable Growth Rate = Return on Equity * (1 - Dividend Payout Ratio). Given that the Return on Equity is 12 percent and the Dividend Payout Ratio is 65 percent, the calculation is: 12% * (1 - 0.65) = 12% * 0.35 = 4.20 percent.