Question

1. Use the following information for Alpha-Beta, Inc. (ABI) for this question.
   

   Sales	$100,000
   Costs	$55,000
   Depreciation	$6,000
   Dividend paid	$10,000
   Retained Earnings Added	$14,500
   Total Assets	$85,000
   Equity	$45,000
   Selling, General and Administrative costs	$0
   Tax Rate	35%

   
     
                   If the profit margin, total asset turnover, and dividend payout ratios for ABI remain unchanged, what is the internal growth rate it can achieve during the following year?

   		25.00%
   		21.86%
   		20.57%
   		19.72%
   		26.87%
   		23.64%

Answer 1

The correct answer is 20.57%

Note:

Sales	100,000
Costs	55,000
Depreciation	6,000
Earnings Before Taxes	3,9000
Less: tax ( 35%)	13,650
Net Income	25,350

Return on Assets = Net Income / Total Assets

= $ 25,350 / $ 85000

= 0.298235294

Retention Ratio = Retained Earnings Added / Net Income

= $14,500 / $ 25,350

= 0.571992110453649

Internal Growth Rate = ( Return on Assets * Retention Ratio) / [ 1-( Return on Assets * Retention Ratio)]

= ( 0.298235294 * 0.571992110453649) / [ 1- ( 0.298235294 * 0.571992110453649)]

= 20.57%