A company with a return on equity of 15% and a payout ratio of 36% would expect a constant-growth rate of:

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BlackTom AI · Accepted Answer

We start by identifying the given numbers: return on equity (ROE) = 15% and payout ratio = 36%.

First, determine the retention ratio, which is the portion of earnings not paid out as dividends. Retention ratio = 1 - payout ratio = 1 - 0.36 = 0.64 (or 64%).

Next, apply the constant-growth model relationship between growth, ROE, and retention: g = ROE × retention. This formula reflects that growth in dividends (and earnings) depends on how much earnings are reinvested and how productive those reinvestments are, as captured by ROE.

Compute g: g = 0.15 × 0.64 = 0.096.

Convert to a percentage: 0.096 equals 9.6%.

In summary, by reinvesting 64% of earnings at an ROE of 15%, the company would support a growth rate of 9.6% per year, assuming other conditions remain constant.

MFIN1021.02|.03 Summer 2025 Fundamentals of Finance [Hession-Kunz] Final Exam- Requires Respondus LockDown Browser

A company with a return on equity of 15% and a payout ratio of 36% would expect a constant-growth rate of:

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