Question

The most recent financial statements for Live Co. are shown here:

Income Statement Balance Sheet
Sales $4,800 Current assets $5,102 Debt $10,201
Costs
3,168

Fixed assets 12,491 Equity 7,392
Taxable income $1,632 Total
$17,593

Total
$17,593

Taxes (34%) 555
Net income
$1,077

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. No external equity financing is possible.
Required:
What is the internal growth rate?
A. 4.48%
B. 4.58%
C. 4.38%
D. 11.36%
E. 1.87%

Answer 1

The answer is "Option A".

Step-by-step explanation:

Using formula:

`\text{Equity Return} = \frac{ \text{Net Income}}{ \text{Total Assets}} * 100`

`= (1,077)/(17,593) * 100 \\\\= 0.0612175297 * 100\\\\= 6.12175297\\\\=6.12 \%`

`\text{Calculating the Plowback Ratio} \ (b) = 1- \text{Dividend Payout Ratio}`

`= 1-0.30 \\\\ = 0.70`

`\text{Internal Growth Rate} = (ROA * b )/((1-ROA * b)) \\\\`

`= (0.0612 * 0.70)/((1-0.0612* 0.70)) \\\\= (0.04284)/(0.95716) \\\\ =0.044754073 \\\\ =4.47\%`