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Compute Simpson Inc's internal growth rate if the firm has an ROA of 15 percent and...

Compute Simpson Inc's internal growth rate if the firm has an ROA of 15 percent and a payout ratio of 23 percent.

Multiple Choice

  • 11.23%

  • 13.06%

  • 3.57%

  • 15.15%

  • 14.89%

Solutions

Expert Solution

Answer:

* Internal growth rate : The maximum growth rate a firm can achieve without external financing of any kind.

* b is the plowback or retention ratio. It is the addition to retained earnings divided by net income, substrated by 1, because everything is not paid out.

Internal growth rate = ( ROA × b ) / 1 - ( ROA × b )

b = 1- 0.23

b = 0.77

Inernal growth rate = (0.15 × 0.77) / [1 - (0.15 × 0.77)]

= 0.1155 / 0.8845

= 13.06%

jeff jeffy answered 2 years ago
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