Asked by Stacey Nolasco on Jun 25, 2024
Verified
If a firm does not have any debt, what is true about the components of the sustainable growth rate?
A) The retention ratio is 100%.
B) The dividend payout ratio is 100%.
C) The ROA multiplied by the retention ratio is equal to the sustainable growth rate
D) The ROE is greater than the ROA.
Sustainable Growth Rate
The maximum rate at which a company can grow without needing to increase financial leverage.
Retention Ratio
The proportion of net income that is retained by a company rather than distributed to its shareholders as dividends.
ROA
Return on Assets, a financial ratio indicating how profitable a company is relative to its total assets, measuring how efficiently assets are utilized.
- Examine the effects of dividend policies on corporate growth and financing approaches.
Verified Answer
KL
Kevin LeonardJul 01, 2024
Final Answer :
C
Explanation :
If a firm does not have any debt, then its sustainable growth rate is solely determined by its earnings retention ratio (RR). The RR is equal to 1, as the firm retains all of its earnings since there are no debt obligations that require payment. Therefore, the equation for the sustainable growth rate simplifies to: ROA x RR = ROA x 1 = ROA.
Learning Objectives
- Examine the effects of dividend policies on corporate growth and financing approaches.