Dogs R Us reported a profit margin of 11.00 percent, total asset turnover of 0.80 times, debt-to-equity of 0.70 times, net income of $550,000, and dividends paid to common stockholders of $330,000. The firm has no preferred stock outstanding. What is Dogs R Us’s internal growth rate? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Answer:
Return on Assets, ROA = Profit Margin * Total Asset
Turnover
Return on Assets, ROA = 0.11 * 0.80
Return on Assets, ROA = 0.088
Payout Ratio = Dividends / Net Income
Payout Ratio = $330,000 / $550,000
Payout Ratio = 0.6
Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 – 0.6
Retention Ratio, b = 0.4
Internal Growth Rate = [ROA * b] / [1 - ROA * b]
Internal Growth Rate = [0.088 * 0.4] / [1 – 0.088 * 0.4]
Internal Growth Rate = 0.0352 / [1 – 0.0352]
Internal Growth Rate = 0.0352 / 0.9648
Internal Growth rate = 0.0365 or 3.65%
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