Question

If a firm's return on equity is 17% and management plans to retain 40% of earnings for
investment purposes, what will be the firm's growth rate?

Answer 1

By a Firm's Growth rate,we mean the rate at which the company's earnigs would be growing and as per the Gordon's Growth Model, Growth can be calculated with the help of below mentioned Formula :-

g = b * r

where,

g means growth rate ,

b means retention ratio,

r means rate of return of the company or return on equity.

Hence using the above mentioned formula, we can derive our growth rate to the question:

g= 0.17 * 0.40

= 0.068

In percentage our final answer is 6.8%