Question

Asymmetric Frames Corp. had a return on equity of 15%. The corporation's earnings per share was $6.00, its dividend payout ratio was 40% and its profit-retention rate was 60%. If these relationships continue, what will be United Financial Corp.'s internal growth rate?

Answer 1

A) 9.0%

Step-by-step explanation:

To determine the company's internal growth rate we must multiply the company's return on equity times the profit retention rate = 15% x 60%.

When a company generates net profits, it can do two things:

1. distribute the profits as dividends ⇒ 40%
2. increase retained earnings ⇒ 60%

When a company increases retained earnings it will have more money to finance new or existing projects, and will be able to grow without obtaining debt.