Question:

Can a CFA or finance expert help me on this finance problem?

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"ROE" means return on equity and "b" means the retention ratio.

The formula is:

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

.12=Sustainable growth rate and .70=b.

Here's the numbers plugged into the formula:

.12 = [ROE(.70)] / [1 – ROE(.70)]

I have to solve for ROE

The answer is:

ROE = .1531 or 15.31%

My question: HOW THE h**l DID MY PROFESSOR GET THAT ANSWER?

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1 ANSWERS


  1. 1) multiply both sides by the denominator (1-ROE*.7)

    2) Use addition to get the ROE and its coefficient on one side, and .12 on the other.

    3) Divide both sides by the coefficient of ROE.

    This is nothing more than tricky-looking algebra. Finance formulas have a way of making people freak out, so dont' worry. Just look for the x, y and z and you'll do fine.

    I also came out with 15.31%. If you plug ROE and b in the first equation, you get g (growth rate)=.12

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