Question

(Measuring growth) Thomas, Inc.'s return on equity is 19 percent and management has plans to retain 23 percent of earnings for investment in the company. a. What will be the company's growth rate? b. How would the growth rate change if management (1) increased retained earnings to 32 percent or (ii) decreased retention to 12 percent? a. The company's growth rate will be %. (Round to two decimal places.) b.) If management increased retained earnings to 32%, the growth rate would be %. (Round to two decimal places.) b. (ii) If management decreased retention to 12%, the growth rate would be %. (Round to two decimal places.)

Answer 1

Growth Rate g = ROE * Retention ratio

a) g = 19 * 23%

g = 4.37%

b) i) g = 19 * 32%

g = 6.08%

ii) g = 19 * 12%

g = 2.28%