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Question:
At the end of the last 12-month period, Romano's Italian Foods had net income of $16.68 million and equity of $115 million. Romano's declared a $7.5 million dividend for the year. Using internally generated funds, Romano's can grow its equity by approximately:
A
8.0% per year.
explanation
g = ROE x retention rate = [16.68 / 115] x [1 − (7.5 / 16.68)] = 0.145 x (1 − 0.45) = 7.975%. This growth rate represents the rate at which a company can grow its equity using internally generated funds.
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