Question

The newspaper reported last week that Tisch enterprises earned $38.6 million this year. The report also stated that the firm’s return on equity is 14 %. The firm retains 75 percent of its earnings. What is the firm’s earnings growth rate? What will next years’s earnings be??

Answer 1

Solution:
a.	Earnings growth rate	10.50	%
Working Notes:
	growth rate (g) = ROE x retention ratio
	ROE =14%
	retention ratio (b) =75%
	b=0.75
	growth rate (g) = ROE x retention ratio
	=14% x 0.75
	=10.50%
b.	Next year’s earnings $	42,653,000
Working Notes:
	Next year’s earnings = Current earnings x (1+growth rate )
	Next year’s earnings = $38.6 million x (1+ 10.50%)
	Next year’s earnings = $38,600,000 x (1+ 0.105)
	Next year’s earnings = $42,653,000
Notes:	Growth rate taken from above calculation.
Please feel free to ask if anything about above solution in comment section of the question.