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Answer :
Final answer:
The future growth rate of the Royal Ridge Resort, calculated by multiplying the retention ratio (0.45) by the return on equity (0.20), is 9%.
Explanation:
The future growth rate of the Royal Ridge Resort can be calculated using the formula for growth rate in the Gordon Growth Model, which states that the growth rate (g) is equal to the retention ratio (b) times the return on equity (ROE). Since the Royal Ridge Resort wants to retain 45% of its future earnings and can reinvest these earnings at a 20 percent return on equity, we can calculate the future growth rate as:
Retention Ratio (b) = 45% = 0.45
Return on Equity (ROE) = 20% = 0.20
Now, we multiply the Retention Ratio by the Return on Equity to find the growth rate:
g = b * ROE
g = 0.45 * 0.20
g = 0.09 or 9%
Hence, the correct answer to the question is a. 9%.
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