Last year Lakesha’s Lounge Furniture Corporation had an ROE of 17.5 percent and a dividend payout ratio of 20 percent.

What is the sustainable growth rate?

The sustainable growth rate (SGR) is the rate at which a company can grow its earnings while maintaining its current financial policies, including the dividend payout ratio and return on equity (ROE). The formula to calculate the sustainable growth rate is:

\[
SGR = ROE \times (1 - \text{Dividend Payout Ratio})
\]

Where:
- ROE is the Return on Equity.
- Dividend Payout Ratio is the percentage of earnings paid out as dividends.

In this case:
- ROE = 17.5% or 0.175
- Dividend Payout Ratio = 20% or 0.20

Now, let's calculate the SGR:

\[
SGR = 0.175 \times (1 - 0.20)
\]

\[
SGR = 0.175 \times 0.80 = 0.14 \text{ or } 14\%
\]

Therefore, the sustainable growth rate is **14%**.

Would you like more details or have any questions? 

Here are 5 related questions for further exploration:
1. How does a company’s dividend policy impact its sustainable growth rate?
2. What happens to the sustainable growth rate if the dividend payout ratio increases?
3. How does the Return on Equity (ROE) affect a company's ability to grow sustainably?
4. What are some strategies to improve a company’s sustainable growth rate?
5. How is the sustainable growth rate different from the internal growth rate?

**Tip:** Sustainable growth assumes no new equity issuance. A company must generate enough internal profits to fund its growth.

Last year Lakesha’s Lounge Furniture Corporation had an ROE of 17.5 percent and a dividend payout ratio of 20 percent. What is the sustainable growth rate?

Learn how to calculate the sustainable growth rate for Lakesha’s Lounge Furniture Corporation, given an ROE of 17.5% and a dividend payout ratio of 20%. Understand the relationship between Return on Equity and dividend policy in determining sustainable growth.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation