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%
