Schweser suggests that ROE is greater than Required Rate of Return during the initial growth phase. That probaby means a higher ROE at the start. Wouldn’t a new company have a lower net income ratio, and therefore a lower ROE at the start? You have fixed costs to overcome in a new business.
The “initial growth” phase is when a company has high profit margins (due to lack of competition, which comes in the “transition” phase), high growth (unsustainable) in earnings and revenue, doesn’t pay a dividend (due to better reinvestment opportunities… hopefully) and has negative free cash flow (due to high capex, like you said).
So the initial growth phase assumes a high profit margin, giving you a high a ROE.
Makes sense. Then how do we make the leap that ROE eventually tapers down to required rate of return?
As Ejreilly said, profit margins will tighten and equity capital will rise (accumulated earnings), so ROE will eventually taper down and catch the required return, even go below it time after.