Question

(Measuring growth) Given that a​ firm's return on equity is 15 percent and management plans to retain 36 percent of earnings for investment​ purposes,

a.  The​ firm's growth rate will be:

​(Round to two decimal​ places.)

b.  If the firm decides to increase its retention​ ratio, what will happen to the value of its common​ stock?  ​

An increase in the retention rate will: (increase or decrease) the rate of growth in​ dividends,

which in turn will: (increase or decrease) the value of the common stock.

Answer 1

a.growth rate = return on equity * retention ratio

=>15%*0.36

=>5.4%.

b.An increase in the retention rate will increase the rate of growth in dividends , which in turn will: increase the value of common stock.

As the growth rate increases the value of stock will increase.