Question

The most recent financial statements for Bello Co. are shown here: Income Statement Balance Sheet Sales $ 19,500 Current assets $ 11,820 Debt $ 16,060 Costs 13,300 Fixed assets 28,800 Equity 24,560 Taxable income $ 6,200 Total $ 40,620 Total $ 40,620 Taxes (23%) 1,426 Net income $ 4,774 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 45 percent dividend payout ratio. What is the internal growth rate?

Answer 1

Answer:

IGR = 9.1640%

Explanation:

$IGR = \frac{ROA \times retention}{1-(ROA \times retention)}$

.45 dividend payout ratio

1 - .45 = .55 retention ratio

ROA = Return on Assets  

$\frac{Earning \: before\: interest\:and\: taxes}{Toal \: Assets}$

Income before taxes 6,200

Assets 11,820 + 28,800 = 40,620 Total Assets

ROA 6,200 / 40,620 = 0.15263417

$IGR = \frac{ROA \times retention}{1-(ROA \times 0.retention)}$

$IGR = \frac{0.15263471 \times .55}{1-(0.15263471 \times 0.55)}$

IGR = 0.09164031 = 9.1640%