Question

Gilmore, Inc., had equity of $145,000 at the beginning of the year. At the end of the year, the company had total assets of $210,000. During the year, the company sold no new equity. Net income for the year was $27,000 and dividends were $5,800.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:

a). Internal growth rate of the company=12.02%

b). Internal growth rate for beginning of period assets=14.71%

c). Internal growth rate for end of period total assets=10.16%

Explanation:

a). The internal growth rate of the company can be expressed as shown;

IGR=ROA×DR

where;

IGR=internal growth rate

ROA=return on asset=Net income/Total average assets

DR=dividend ratio=1-(dividend payment/net income)

In our case;

Return on asset=Net income/total average assets

Net income=$27,000

Total average assets=(Assets at the beginning of the year+assets at the end of the year)/2

Total average assets=(145,000+210,000)/2=$177,500

Return on asset=(27,000/177,500)×100=15.21%

Dividend ratio=1-(dividend payment/net income)=1-(5,800/27,000)

Dividend ratio=1-0.21=0.79

Internal growth rate=return on asset×dividend ratio

Internal growth rate=15.21%×0.79=12.0159%

Internal growth rate of the company=12.02%

b). Internal growth rate for beginning assets

Return on asset=Net income/total assets at the beginning of the year

Net income=$27,000

Total assets at the beginning of the year=145,000

Return on asset=(27,000/145,000)×100=18.62%

Dividend ratio=1-(dividend payment/net income)=1-(5,800/27,000)

Dividend ratio=1-0.21=0.79

Internal growth rate=return on asset×dividend ratio

Internal growth rate=18.62%×0.79=14.71%

Internal growth rate for beginning of period assets=14.71%

c). Internal growth rate for end of period total assets

Return on asset=Net income/total assets at the beginning of the year

Net income=$27,000

Total assets at the end of the year=210,000

Return on asset=(27,000/210,000)×100=12.86%

Dividend ratio=1-(dividend payment/net income)=1-(5,800/27,000)

Dividend ratio=1-0.21=0.79

Internal growth rate=return on asset×dividend ratio

Internal growth rate=12.86%×0.79=10.16%

Internal growth rate for end of period total assets=10.16%