Question

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

Income Statement		Balance Sheet
Sales	$4,300	Current assets	$4,570	Debt	$9,138
Costs	2,838	Fixed assets	11,190	Equity	6,622
Taxable income	$1,462	Total	$15,760	Total	$15,760
Taxes (24%)	351
Net income	$1,111

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 18 percent dividend payout ratio.

What is the internal growth rate?

Answer 1

The internal growth rate is computed as follows:

= (ROA x b) / (1 - ROA x b)

ROA is computed as follows:

= Net Income / Total Assets

= $ 1,111 / $ 15,760

= 0.070494924

b is computed as follows:

= 1 - dividend payout ratio

= 1 - 0.18

= 0.82

So, the growth rate will be as follows:

= (0.070494924 x 0.82) / (1 - 0.070494924 x 0.82)

= 6.14% Approximately