If the Crash Davis Driving School has an ROE of 16.3 percent and a payout ratio of 62 percent. Required: What is its sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Sustainable growth rate % Explanation: To find the sustainable growth rate we need the plowback, or retention, ratio. The plowback ratio is: b = 1 – Payout ratio b = 1 – .62 b = .38 Now, we can use the sustainable growth rate equation to find: Sustainable growth rate = [(ROE)(b)] / [1 – (ROE)(b)] Sustainable growth rate = [.163(.38)] / [1 – .163(.38)] Sustainable growth rate = .0660, or 6.60%

If the Crash Davis Driving School has an ROE of 16.3 percent and a payout ratio of 62 percent.

Required:

What is its sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Sustainable growth rate

%

Explanation:

To find the sustainable growth rate we need the plowback, or retention, ratio. The plowback ratio is:

b = 1 – Payout ratio

b = 1 – .62

b = .38

Now, we can use the sustainable growth rate equation to find:

Sustainable growth rate	=	[(ROE)(b)] / [1 – (ROE)(b)]
Sustainable growth rate	=	[.163(.38)] / [1 – .163(.38)]
Sustainable growth rate	=	.0660, or 6.60%