Question

If Levine, Inc., has an ROA of 7.8 percent and a payout ratio of 25 percent, what is its internal growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Internal growth rate %

Answer 1

The internal growth rate of Levine, Inc. is 5.89%.

Step-by-step explanation:

The internal growth rate is the rate at which a company can grow its sales and assets without the need for external financing. It measures the company's ability to generate growth using its own retained earnings. The formula to calculate the internal growth rate is: Internal Growth Rate = (ROA x Retention Ratio) / (1 - ROA x Retention Ratio)

In this case, the ROA is 7.8% and the payout ratio is 25%. The retention ratio can be calculated by subtracting the payout ratio from 1: Retention Ratio = 1 - Payout Ratio = 1 - 0.25 = 0.75.

Now we can substitute the values into the formula: Internal Growth Rate = (0.078 x 0.75) / (1 - 0.078 x 0.75) = 0.0585 / 0.9935 = 0.0589.

Finally, we convert the decimal to a percentage: Internal Growth Rate = 0.0589 x 100% = 5.89%.

Answer 2

The internal growth rate for Levine, Inc. is 5.85%

Step-by-step explanation:

The internal growth rate of a company is the maximum rate at which a company can grow its sales and assets without needing any external financing. The formula for calculating the internal growth rate is:

Internal Growth Rate = Return on Assets (ROA) x (1 – Payout Ratio)

In this case, the ROA is given as 7.8% and the payout ratio is 25%. To calculate the internal growth rate, substitute these values into the formula:

Internal Growth Rate = 0.078 x (1 – 0.25)

Internal Growth Rate = 0.0585 or 5.85%

Therefore, the internal growth rate for Levine, Inc. is 5.85%.