Ifweassume,forinstance,astablegrowthrateof 4 percent
(basedonthegrowthrateoftheeconomy)forGoldmanSachs
and a return on equity of 12 percent (based on industry
averages),wewouldbeabletocomputetheretentionratioin
stable growth:
Goldman Sachs will haveto reinvest 33.33 percent of its
earningsintothefirmtogenerateits expectedgrowthof 4
percent; it can pay out the remaining 66.67 percent.
Inafreecashflowtoequitymodel,wherewearefocusingon
netincomegrowth,theexpectedgrowthrateisafunctionof
the equity reinvestment rate and the return on equity.
The equity reinvestment rate can then be computed as
follows:
If, forinstance, we assume thatToyota willhave a stable
growthrateof 2 percentandthatitsreturnonequityinstable
growthis 8 percent,wecanestimateanequityreinvestment
rate: