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%
