Question

The Royal Ridge Resort expects an earnings per share of $9 in the coming year. Investors require a 20% required rate of return. The Royal Ridge Resort expect to grow in the future and, therefore, wants to retain 45% of its future earnings (this retention will remain constant in the future). These earnings can be reinvested, bearing 20 percent return on equity (this expected return on equity will remain unchanged in the future). Based on this information, the future growth rate of the Royal Ridge Resort is equal to:

Group of answer choices
a. 9%
b. 7%
c. 6%
d. 8%

Answer 1

The future growth rate of the Royal Ridge Resort, calculated by multiplying the retention ratio (0.45) by the return on equity (0.20), is 9%.

Step-by-step explanation:

The future growth rate of the Royal Ridge Resort can be calculated using the formula for growth rate in the Gordon Growth Model, which states that the growth rate (g) is equal to the retention ratio (b) times the return on equity (ROE). Since the Royal Ridge Resort wants to retain 45% of its future earnings and can reinvest these earnings at a 20 percent return on equity, we can calculate the future growth rate as:

Retention Ratio (b) = 45% = 0.45
Return on Equity (ROE) = 20% = 0.20

Now, we multiply the Retention Ratio by the Return on Equity to find the growth rate:

g = b * ROE
g = 0.45 * 0.20
g = 0.09 or 9%

Hence, the correct answer to the question is a. 9%.