Question

a company has annual sales of 96,700$,a profit margin of 7.45 percent ,and payout ratio of 40 percent . The firm has 11,500$ of debt and owners’ equity of 31,200$ . What is the internal growth rate for this firm assuming the payout ratio remains constant

Answer 1

Answer:

Total Assets = Debt + Owners Equity
Total Assets = $11,500 + $31,200
Total Assets = $42,700

Net Income = Profit Margin * Sales *100
Net Income = 0.0745 * $96,700
Net Income = $7,204.15

ROA = Net Income / Total Assets *100
ROA = $7,204.15 / $42,700 *100
ROA = 16.87%

Retention Ratio, b = 1- Payout Ratio
Retention Ratio, b = 1 - 0.40
Retention Ratio, b = 0.60

Internal Growth Rate = [ROA * b] / [1 - ROA * b]
Internal Growth Rate = [0.1687 * 0.60] / [1 - 0.1687 * 0.60]
Internal Growth Rate = 0.10122 / [1 - 0.10122]
Internal Growth Rate = 0.10122 / 0.89878
Internal Growth Rate = 0.1126 or 11.26%