Sustainable Growth Rate

A company decides to pay a constant dividend in currency units which is less than its net income. The company has a positive, constant return on equity. It is most likely that the sustainable growth rate is:

Not quite. While dividends are constant in currency terms and ROE is constant as well, consider what's happening to the retention rate.

Correct! If ROE is constant and positive, and assuming any payout ratio less than 1, then retained earnings is increasing, earnings are increasing, and constant dividends in currency terms means that the dividend payout ratio must be decreasing. This also means that the retention ratio is increasing. An increasing retention ratio with a constant ROE suggests an increasing sustainable growth rate. Note that while dividends are obviously not growing right now, the sustainable rate of how quickly they _could_ grow if a constant payout ratio was adopted is what is changing here.

Not exactly. This would only be the case if the retention ratio were decreasing over time, but this isn't the case here.

constant.

increasing.

decreasing.