Question

If Fairlane Company has an ROA of 8.3 percent and a payout ratio of 35 percent, what is its internal growth rate?

Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.9., 32.16.

Answer 1

The internal growth rate of Fairlane Company is calculated using the formula ROA x (1 - payout ratio), leading to a result of 5.40% after incorporating the given values of an 8.3% ROA and a 35% payout ratio.

Step-by-step explanation:

To calculate the internal growth rate of Fairlane Company, we need to consider its return on assets (ROA) and its payout ratio. The internal growth rate can be found using the formula:

Internal Growth Rate = ROA x (1 - payout ratio)

The ROA is given as 8.3%, and the payout ratio is 35%. Therefore, the retained earnings portion is (1 - 0.35), which equals 0.65 or 65%.

So, we calculate the internal growth rate as follows:

Internal Growth Rate = 0.083 x (1 - 0.35) = 0.083 x 0.65

Internal Growth Rate = 0.05395 or 5.40% (after rounding to two decimal places)

Thus, the internal growth rate of Fairlane Company is 5.40%.