Computing sustainable dividend payout ratio

Good morning.

Reading 27 Practice problem 44 (official curriculum)

Why do we use the required rate of return to compute b instead of using ROE? .

Thank you

Setting ROE = required rate of return is an assumption for companies in the mature phase that can do no more than earn investor’s opportunity cost of capital.

Take note that the ROE in the sustainable growth rate refers to the rate of return expected to be earned one new investments. We commonly assume that ROE is a good approximate, but that could be vary on a case-to-case basis.

You mean to say compute g?

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Thank you!

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