Given that a firm's return on equity is

18

percent and management plans to retain

40

percent of earnings for investment purposes, what will be the firm's growth rate? If the firm decides to increase its retention rate, what will happen to the value of its common stock?

Question content area bottom

Part 1

a.The firm's growth rate will be

7.207.20%.

(Round to two decimal places.)

Part 2

b.If the firm decides to increase its retention ratio, what will happen to the value of its common stock?(Select from the drop-down menus.)

An increase in the retention rate will

increase

the rate of growth in dividends, which in turn will

increase

the value of the common stock.