Question

Levine, Inc., has an ROA of 8.6 percent and a payout ratio of 33 percent.

What is its internal growth rate?

Answer 1

Step-by-step explanation:

Workings

Internal growth rate is the highest possible growth attained by a business without obtaining outside funding but with its retained earning.

Given information

ROA = 8.6%

Percentage Payout ratio = 33%

Internal growth rate = (ROA * Retention ratio) / 1 - (ROA * Retention ratio)

Retention ratio is the percentage earning that is no paid out in dividends

To calculate the retention ratio , we use the formula

Retention ratio = (1-percentage pay out ratio)

= 1 - 0.33 = 0.67

Substituting retention ratio for 0.67 in the inter growth rate formula

Therefore

Internal growth rate = (0.086*0.67)/1-(0.086*0.67)

0.05762/(1-0.05762) = 0.05762/0.94238

=0.0611

= 6.11%