DataCamp

Calculate Retention Ratio

The perpetuity growth rate (PGR) should be tested against economic reality as well as the reinvestment and return on equity projections during the terminal period. For example, the PGR cannot be greater than the long-term growth rate of the overall economy. Otherwise, the firm will grow to a point when it becomes larger than the economy and that doesn't make any sense.

The PGR should be sustainable over the very long term, so one can think of this rate as a growth rate that can be sustained by the normal operations of the firm into perpetuity. This implies that the growth is a function of the portion of the firm's earnings that are reinvested back into the firm and how much those new investments are expected to return. The first component of this calculation is the retention ratio, which is the amount of reinvestment divided by the after-tax income. The objects after_tax_income, depn_amort, incr_wc, and capex for the 2017 to 2021 projections are stored in memory. For purposes of this analysis, assume the retention ratio is calculated using the last year's projections.

Calculate the amount of reinvestment.
Calculate the retention ratio.

Note: Use the last year's projections (the fifth element of the vector).

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Exercise

Calculate Retention Ratio

Instructions