Question

Gilmore, Inc., had equity of $130,000 at the beginning of the year. At the end of the year, the company had total assets of $285,000. During the year, the company sold no new equity. Net income for the year was $28,000 and dividends were $3,200. a. Calculate the internal growth rate for the company. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the internal growth rate using ROA × b for beginning of period total assets. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. Calculate the internal growth rate using ROA × b for end of period total assets. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer and Explanation:

a and b The computation of internal growth rate is shown below:-

ROA = Net Income ÷ Total Assets

= $28,000 ÷ $285,000

= 9.82%

Retention Ratio = b = (Net Income - Dividends) ÷ Net Income

= ($28,000 - $3,200) ÷ $28,000

= $24,800 ÷ $28,000

= 88.57%

Internal Growth Rate = (ROA x b) ÷ (1 - ROA x b)

IGR = 9.82% × 88.57% ÷ (1 - 9.82% × 88.57%)

= 9.53%

c. Total Assets (t=1) = Total Assets (t=1) + Net Income - Dividends

= 285,000 + 28,000 - 3,200

= $253,800

ROA = 28,000 ÷ $253,800

= 11.03%

IGR = 11.03% × 88.57% ÷ (1 - 11.03% × 88.57%)

= 10.83%