Question

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

A)100 percent
B)equal to the ROA
C)equal to the ROA divided by (1-ROA)
D)infinite
E)zero percent

Answer 1

The internal growth rate of a firm with a 100 percent dividend payout ratio is zero percent.

Step-by-step explanation:

The correct answer is E)zero percent. When a firm has a 100 percent dividend payout ratio, it means that it is distributing all of its earnings as dividends to shareholders. In this case, there are no retained earnings left, which means there is no internal growth rate. The internal growth rate is the maximum rate at which a firm can grow its sales and assets using only its retained earnings without the need for external financing.