Exercise

Perpetuity Growth Rate Calculation

Once you calculate the retention ratio, we would multiply this by the return on new invested capital to arrive at the expected growth rate. For this exercise, assume that the return on new invested capital is equal to your cost of equity ke of 10.5%. A rationale for this assumption is that in a competitive market you only earn a return equal to your cost of capital, because in equilibrium you would expect that firms will not generate excess profits. Use the retention_ratio you calculated in the prior exercise to calculate the expected growth rate.

Instructions

100 XP

Calculate the expected growth rate.