If a company has a return on equity of 25% and wants a growth rate of 10%, how much of ROE should be retained? A. 40% B. 50% C. 60% D. 70%
Question
Solution 1
To determine how much of the return on equity (ROE) should be retained, we need to calculate the retention ratio. The retention ratio is the percentage of earnings that a company chooses to reinvest back into the business for growth purposes.
The formula to calculate the retention ratio is:
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