Question

Roy's Welding has annual sales of $96,700, a profit margin of 7.45 percent, and a payout ratio of 40 percent. The firm has $11,500 of debt and owners' equity of $31,200. What is the internal growth rate for this firm assuming the payout ratio remains constant?

Answer 1

Answer: 11.26%

Explanation:

From the question, we are told that Roy's Welding has annual sales of $96,700, a profit margin of 7.45 percent, and a payout ratio of 40 percent ans that the firm has $11,500 of debt and owners' equity of $31,200.

The internal growth rate for this firm assuming the payout ratio remains constant goes thus:

We have to calculate the net income first and this will be:

= $96700 × 7.45%

= $7204.15

The total assets will be debt plus the equity. This will be:

= $11500 + $31200

= $42700

ROA will now be net income divided by

the total assets which will be:

=7204.15/42700

= 0.1687

Retention ratio will be:

= 1-payout ratio

= 1 - 40%

= 1 - 0.4

= 0.6

Therefore, internal growth rate will be:

=(ROA × Retention ratio)/[1-(ROA × Retention ratio)]

=(0.1687 × 0.6)/[1-(0.1687 × 0.6)]

= 0.10122/(1 - 0.10122)

= 0.10122/0.89878

= 0.1126

=11.26%