Question
Asked Dec 7, 2019
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The newspaper reported last week that Tisch Enterprises earned $34.07 million this year. The report also stated that the firm’s return on equity is 16 percent. The firm retains 75 percent of its earnings. What will next year's earnings be? 

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Expert Answer

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Step 1

Retention ratio is the percentage of earnings of a company which a company retains for different purpose.

Growth rate is the rate at which the earnings of a company grow year by year. It is calculated by multiplying return on equity with the retention ratio.

Step 2

Given:

Earnings: $34.07 million

Return on equity: 16%

Retention ratio: 75%

Earning growth rate is calculated as:

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Earning growth rate =(ROE × retention ratio) = (16% x0.75) =12%

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Step 3

Earnings of next year i...

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Next year earning = current earning x(1+ growth rate) = $34.07million × (1+12%) = $34, 070,000 x(1+0.12) = $34, 070,000×1.12 = $38,158,400

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