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CFA Level 1 & 2
Topic: Equity / Corporate Finance
Why do we need to study this concept?
1) It can help in estimating the stable growth rate in a Gordon growth model valuation, or
2) You are trying to calculate the terminal value of the stock in a multistage DDM, so you need the estimate the mature growth rate to plug in the Gordon growth formula.
The retention rate should be multiplied by the rate of return expected to be earned on new investment. Analysts commonly assume that the rate of return is well approximated by the return on equity.
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