CA Final · Advanced Financial Management · Financial Policy and Corporate Strategy
Kaveri Textiles Ltd has equity of ₹500 crore and net profit of ₹75 crore. It pays out 40% of profit as dividend. Assuming ROE stays constant and no external equity is raised, what is the sustainable growth rate in equity-funded growth?
Sustainable growth rate is 9%. Return on equity is 15% (₹75 crore on ₹500 crore), and the firm retains 60% of earnings after a 40% payout, so growth supported by internal equity is 15% multiplied by 0.60, which equals 9%.
- A15.0%
- B9.0%Correct
- C6.0%
- D10.0%
Explanation
ROE = 75/500 = 15%. Retention ratio = 1 − 0.40 = 0.60. Sustainable growth = ROE × retention = 15% × 0.60 = 9%. The 15% option ignores retention (assumes full retention), and 6% wrongly applies the payout ratio instead of retention.
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