Question

The newspaper reported last week that Bennington Enterprises earned $34.08 million this year. The report also stated that the firm’s return on equity is 17 percent. The firm retains 75 percent of its earnings.

What is the firm's earnings growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What will next year's earnings be? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Answer 1

Growth rate = 12.75%

Next year earnings = $38,425,200

Step-by-step explanation:

Data provided in the question:

Earnings = $34.08

Firm’s return on equity = 17%

Retention rate = 75%

Now,

Growth rate = [ Retention rate ] × [ Return on equity ]

= 0.75 × 0.17

= 0.1275

or

= 0.1275 × 100%

= 12.75%

Next year earnings = Earnings × ( 1 + Growth rate )

= $34.08 million × ( 1 + 0.1275 )

= $38.4252 million

= $38,425,200