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Retained Essay Topics & Paper Examples

Mini case solution

The keys to the company’s future value and growth are profitability (ROE) and the reinvestment of retained earnings. Retained earnings are determined by dividend payout. The spreadsheet sets ROE at 15% for the five years from 2006 to 2010. If Reeby Sports will lose its competitive edge by 2011, then it cannot continue earning more than its 10% cost of capital. Therefore ROE is reduced to 10% starting in 2011. The payout ratio is set at .30 from 2006 onwards. Notice that the long-term growth rate, which settles in between 2011 and 2012, is ROE × ( 1 – dividend payout ratio ) = .10 × (1 – .30) = .07. The spreadsheet allows you can vary ROE and the…