A company has just increased its dividend payout ratio.

The sustainable growth rate (SGR) represents the maximum rate at which a firm can grow its sales, assets, and earnings without raising new external equity. It is calculated as ROE × retention ratio, where the retention ratio equals one minus the dividend payout ratio. When a firm increases its dividend payout ratio, it retains less earnings for reinvestment, thereby reducing internally generated equity growth. Unless return on equity increases enough to offset this reduction—which is not assumed here—the sustainable growth rate will decline. Financial management theory emphasizes the trade-off between paying dividends and reinvesting earnings to support future growth. Option C correctly reflects this fundamental relationship between dividend policy and sustainable growth.