A given firm predicts that under its current retention rate of 10% its net income would increase by 1% in a year-over-year basis

Finance Dec 10, 2020

A given firm predicts that under its current retention rate of 10% its net income would increase by 1% in a year-over-year basis. what would have to be the retention rate so that this firm could grow its net income 5% in a year-over-year basis?

A 100%

B 75%

C 10%

D. 25%

E 50%

Expert Solution

Under the 10% retention rate; its net income would increase by 1% in a year-over-year basis

Therefore for firm could grow its net income 5% in a year-over-year basis or 5% in a year-over-year basis increase in net income;

Retention rate = (10%/1%) * 5%

= 50%

Therefore, correct answer is option E. 50%

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