Question

Bio-Plasma Corporation is growing at 31% per year. It is

all-equity-financed and has total assets of $2.7 million. Its
return on equity is 22%. Its plowback ratio is 45%. What is the
internal growth r

Answer 1

The internal growth rate of Bio-Plasma Corporation, calculated using the formula (ROE * plowback ratio) / (1 - (ROE * plowback ratio)), is 10.99%. This suggests how much the company can grow using internally generated funds alone, differing from the 31% total growth rate which may include external funding sources.

Step-by-step explanation:

Calculating the Internal Growth Rate

The student is asking about the internal growth rate of Bio-Plasma Corporation, which is a measure of how much a company can grow with its own financing, specifically from retained earnings, without needing external financing.

To calculate the internal growth rate, we use the formula

Internal Growth Rate = (Return on Equity * Plowback Ratio) / (1 - (Return on Equity * Plowback Ratio)).

Given that Bio-Plasma Corporation has a return on equity (ROE) of 22% and a plowback ratio of 45%, we can insert these values into the formula:

Internal Growth Rate = (0.22 * 0.45) / (1 - (0.22 * 0.45))
Internal Growth Rate = 0.099 / (1 - 0.099)
Internal Growth Rate = 0.099 / 0.901
Internal Growth Rate = 0.1099 or 10.99%

The internal growth rate for Bio-Plasma Corporation is 10.99%, which is the maximum rate at which the company can grow using its retained earnings without having to resort to external financing. It's important to note that this rate is different from the 31% overall growth rate of the company mentioned, which might be inclusive of growth from external sources of capital, such as issuing new equity or debt.