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Imagine a corporation with $1,000,000 of assets and a debt ratio of 40%. ROE (return on equity) is expected to be 20% for the foreseeable
Imagine a corporation with $1,000,000 of assets and a debt ratio of 40%. ROE (return on equity) is expected to be 20% for the foreseeable future. Assuming the firm maintains the same amount of debt indefinitely (as opposed to keeping the same debt ratio), respond to the following questions.
e. If the firm pays 50% of its earnings as dividends and uses an additional 20% of its earnings to repurchase shares from its shareholders, at what rate would the firm grow from year to year? Complete the table. Dividends Year Beginning balance, equity Net income Repur- chases Ending balance, equity Growth rate = Return on equity net income / opening equity 1 % % 2 % % 3 % %Step by Step Solution
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