Question

Problem 4-6 Calculating Internal Growth (LO3) The most recent financial statements for Bello Co. are shown here: Income Statement Sales $19.200 Costs 13,050 Current assets Fixed assets Balance Sheet $ 11,760 Debt 27.450 Equity $15,880 23,330 Taxable income $ 6,150 Total $39.210 Total $39,210 Taxes (24%) 1.476 Net income $ 4.674 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? (Do not round intermediate calculations and enter your answer as a percent rounded 2 decimal places, e.g. 32.16.) Intemal growth rate

Answer 1

Internal growth rate = (Return on assets x Retention ratio) / [1 - (Return on assets x Retention ratio)]

Here,

Return on assets = Net income / Total assets = $4,674 / $39,210 = 0.119204285

And,

Retention ratio = 1 - Dividend payout ratio = 1 - 0.45 = 0.55

Therefore,

Internal growth rate = (0.119204285 x 0.55) / [1 - (0.119204285 x 0.55)] = 0.0702

Thus,

Internal growth rate is 7.02%.