where
gt= Growth rate in net income
NIt= Net income in yeart
Giventhedefinitionofreturnonequity,thenetincomein
yeart− 1 can be written as:
where ROEt−1= Return on equity in yeart− 1
The net income in yeartcan be written as:
Assuming that the return on equity is unchanged, that is,
ROEt= ROEt−1= ROE,
wherebistheretentionratio.Notethatthefirmisnotbeing
allowedtoraiseequitybyissuingnewshares.Consequently,
thegrowthrateinnetincomeandthegrowthrateinearnings
per share are the same in this formulation.
ILLUSTRATION 4.3: Growth in Earnings per Share:
Examples
Inthisillustration,weconsidertheexpectedgrowthratein
earningsbasedontheretentionratioandreturnonequityfor
twofinancial servicefirms(GoldmanSachs andJPMorgan