Last year Rain Repel Corporation had an ROE of 10 percent and a dividend payout ratio of 80 percent. What is the sustainable growth rate? Multiple Choice 1.11 percent 2.04 percent 44.44 percent 50.00 percent

2.04 percent

Explanation:

Given that,

ROE = 10 percent

Dividend payout ratio = 80 percent

ROE = Net income : Equity

= 10 percent

Retention Ratio = 1 - Dividend payout ratio

= 1 - 80 percent

= 0.2 or 20%

Therefore,

Sustainable growth rate:

= (ROE * Retention Ratio) : [1 - (ROE * Retention Ratio) ]

= (10% * 20%) : [1 - (10% * 20%) ]

= 0.02 : (1 - 0.02)

= 0.02 : 0.98

= 0.0204 or 2.04%