CFA Curriculum 2020 Equity EOC Q no. 44 - Pg 263
In the solutions, ROE is simply taken as the Required rate of return in the formula of Sustainable Growth Rate to calculate sustainable Dividend Payout Ratio. I know ROE and ROR are different. So what can possibly be the explaination for using it interchangably here?
In calculation of Sustainable growth rate, I believe, the full-fledged formula is
Sustainable Growth Rate = Retention Ratio x Rate of Return (ROR) on Investments in Retained Earnings
where Retention Ratio = 1 - Dividend Payout
As you can see ROE can be used in place of ‘ROR on investment in Retained Earnings’ because Retained Earnings at the end of the day are part of Equity.
Hope this helps. Cheers !