Question

Good Foods has net income of $82,490, total equity of $518,700, and total assets of $1,089,500. The dividend payout ratio is .30. What is the internal growth rate?A) 2.32 percentB) 3.57 percentC) 5.60 percentD) 2.87 percentE) 4.94 percent

Answer 1

Answer:

5.6%

Explanation:

Internal growth rate can be calculated as below:

Internal growth rate = (Return on asset x Retention Rate)/[1 - (Return on asset x Retention Rate)]

Retention rate  = 1 - Payout ratio = 1 - 30% = 70%

Return on asset = Net income/Asset = 82,490/1,089,500 = 7.6%

Putting all the number together, we have:

Sustainable growth rate = (7.6% x 70%)/[1 - (7.6% x 70%)] = 5.6%