NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles
A company earns a return on equity of 15% and retains 40% of its earnings. Assuming the ROE and retention ratio stay constant, what is its sustainable growth rate?
The sustainable growth rate is 6%. It equals return on equity multiplied by the retention ratio: 15% times 40%. Using the 60% payout ratio instead would wrongly give 9%.
- A6%Correct
- B9%
- C15%
- D25%
Explanation
Sustainable growth g = ROE x retention ratio = 15% x 0.40 = 6%. A 9% answer comes from using the payout ratio (60%) instead of retention. 15% ignores retention, and 25% has no basis in the data.
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