Changeinbookvalueofequityfrom 2003 to 2004 =26,888−
22,913 = $3,975 million
Totheextentthatthemarginalreturnonequityrepresentsthe
returnsonnewinvestments,thisoffersacautionarynotethat
thereturnonequityonnewinvestmentsmaybelowerthan
the historical returns.
Effects of Changing Return on Equity
Sofarin thissection,wehaveoperatedontheassumption
thatthereturnonequityremainsunchangedovertime.Ifwe
relax this assumption, we introduce a new component to
growth:theeffectof changingreturnonequityon existing
assetsovertime.Consider,forinstance,afirmthathasabook
valueofequityof$100millionandareturnonequityof 10
percent. If this firm improves its return on equity to 11
percent, itwillpostan earningsgrowth rateof 10 percent
evenifitdoesnotreinvestanymoney.Thisadditionalgrowth
canbewrittenasafunctionofthechangeinthereturnon
equity.
whereROEtisthereturnonequityinperiodt.Thiswillbein
addition to the fundamental growth rate computed as the