Question

Thomas, Inc.'s return on equity is 16 percent and management has plans to retain 24 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 (i) increased retained earnings to 31 percent or (ii) decreased retention to 12 percer
a. The company's growth rate will be %. (Round to two decimal places.)
b. (i) If management increased retained earnings to 31%, 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

a. The company's growth rate will be 3.84%. b. (i) If management increased retained earnings to 31%, the growth rate would be 4.96%. (ii) If management decreased retention to 12%, the growth rate would be 1.92%.

Step-by-step explanation:

a. To calculate the company's growth rate, we can use the formula:

Growth Rate = (Return on Equity) * (Retention Rate)

Given that the return on equity is 16% and the retention rate is 24%, we can substitute these values into the formula:

Growth Rate = (0.16) * (0.24) = 0.0384 = 3.84%

Therefore, the company's growth rate will be 3.84%.

b. (i) If management increased retained earnings to 31%, the new growth rate can be calculated as:

Growth Rate = (0.16) * (0.31) = 0.0496 = 4.96%

(ii) If management decreased retention to 12%, the new growth rate can be calculated as:

Growth Rate = (0.16) * (0.12) = 0.0192 = 1.92%