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assets and costs are proportional to sales. debt and equity are not. the company maintains a constant 30 percent dividend payout ratio. what is the internal growth rate?

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Tundexi

The Internal growth rate equals to 5.73%.

What is an Internal growth rate?

It refers to the highest level of growth that is achievable for a business without obtaining outside financing

To calculate the internal growth rate, we need to calculate the ROA,

ROA = NI / TA

ROA = $3,420 / $37,850

ROA = .0904, or 9.04%

The plowback ratio, b, is one minus the payout ratio, so:

b = 1 - .40

b = .60

Internal growth rate = (ROA × b) / [1 - (ROA × b)]

Internal growth rate = [.0904(.60)] / [1 - .0904(.60)]

Internal growth rate = 0.0573

Internal growth rate = 5.73%

Therefore, the Internal growth rate equals to 5.73%.

Full word " Income Statement Balance Sheet

Sales $ 14,200 Current assets $ 11,100 Debt $ 15,600

Costs 8,500 Fixed assets 26,750 Equity 22,250

Taxable income $ 5,700 Total $ 37,850 Total $ 37,850

Taxes (40%) 2,280 Net income $ 3,420 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external financing is possible. What is the internal growth rate?"

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