Question

Go-Go Industries is growing at 45% per year. It is all-equity-financed and has total assets of $1 million. Its return on equity is 40%. Its plowback ratio is 55%. a. What is the internal growth rate? (Enter your answer as a percent rounded to 2 decimal places.) b. What is the firm’s need for external financing this year? (Enter your answer in dollars not in millions. Do not round intermediate calculations.) c. By how much would the firm increase its internal growth rate if it reduced its payout ratio to zero? (Enter your answer as a whole percent.) d. By how much would such a move reduce the need for external financing? (Enter your answer in dollars not in millions. Do not round intermediate calculations.)

Answer 1

Part A:

Internal growth rate = (ROA*Plowback ratio)/(1-(ROA*Plowback ratio))

Therefor Internal growth rate = (40%*45%)/(1-(40%*45%)) = 21.95%

Part B:

Don't know the answe

Part B:

If payout ratio is 0%

Internal growth rate = 40%/(1-40%) = 66.67%, therefor increased by 44.72%

Part C:

Don't know the answer