Question

Fairlane company. has an roa of 8 percent and a payout ratio of 31 percent. what is its internal growth rate?

Answer 1

The internal growth rate is approximately 5.52%, calculated by using the return on assets of 8% and the plowback ratio, derived from a 31% payout ratio.

Step-by-step explanation:

The internal growth rate of a company refers to the highest level of growth achievable for a company without resorting to external financing. To calculate it, we can use the formula that incorporates the company's return on assets (ROA) and the plowback ratio (the reinvestment rate), which is the complement of the payout ratio. Here's the calculation:

Internal Growth Rate Calculation

First, we find the plowback ratio, which is 1 minus the payout ratio:

• Plowback ratio = 1 - payout ratio
• Plowback ratio = 1 - 0.31 = 0.69

Next, we apply this to the following formula:

• Internal Growth Rate = ROA * Plowback Ratio / (1 - ROA * Plowback Ratio)
• Internal Growth Rate = 0.08 * 0.69 / (1 - 0.08 * 0.69)
• Internal Growth Rate ≈ 0.0552 or 5.52%

Therefore, the internal growth rate for Fairlane Company is approximately 5.52%.