Question

he newspaper reported last week that Bennington Enterprises earned $34.05 million this year. The report also stated that the firm’s return on equity is 15 percent. Bennington retains 85 percent of its earnings. What is the firm's earnings growth rate? What will next year's earnings be?

Answer 1

Answer - growth rate = 12.75%, Next years earnings = $38,391,375

Explanation:

The growth rate of earnings is the return on equity (ROE) times the retention ratio (b) , so:

growth rate = ROE × b

growth rate = .15(.85)

growth rate = .1275 or 12.75%

To find next year’s earnings, we simply multiply the current earnings times one plus the growth rate, so:

Next year's earnings = Current earnings(1 + growth rate)

Next year's earnings = $34,050,000(1 + .1275)

Next year's earnings = $38,391,375

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