USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 75 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 9.2. What is the expected sustainable growth rate?
A) 9.0 percent
B) 7.2 percent
C) 6.0 percent
D) 3.0 percent
E) 3.6 percent

Question

Quizplus · Accepted Answer

The sustainable growth rate is calculated as the return on equity (ROE) multiplied by the retention ratio (1 - dividend payout ratio). Here, ROE is 12%, and the retention ratio is 25% (1 - 0.75). Thus, the sustainable growth rate is 12% * 0.25 = 3.0%.