Question

1. Alpha Computer has sales of $618,900, a profit margin of 13.2 percent, a total asset turnover rate of 1.54, and an equity multiplier of 1.06. What is the return on equity? Show your calculations!

1. 18.91 percent
   B. 12.67 percent

C. 18.28 percent
D. 21.55 percent

2. Good Foods has net income of $82,490, total equity of $518,700, and total assets of $1,089,500. The dividend payout ratio is .30. What is the internal growth rate? Show your calculations!

1. 2.32 percent
2. 3.57 percent
   C. 5.60 percent
   D. 2.87 percent

Answer 1

Solution:
1st Question.
	Answer is D. 21.55 percent
Working Notes:
	Normally get Return of Equity (ROE)
	Return on equity (ROE) = Net Income/Total Equity
	But With given data
	Return on equity (ROE) we can compute using Du-pont formula
	ROE = (Profit margin)(Total asset turnover)(Equity multiplier)
	ROE = (13.2%)(1.54)(1.06)
	ROE = 0.2154768
	ROE = 21.54768%
	ROE = 21.55%
Hence	Return On Equity (ROE) =21.55%
2nd Question
	Answer is C. 5.60 percent
Working Notes:
	Retention ratio (b) = 1- payout ratio
	b= 1-0.30 = 0.70
	b=70%
	Internal growth rate = (ROA x b) /(1-(ROA x b))
	Retention ratio (b) =61% = 0.61
	ROA (Return on Assets)=??
	Internal growth rate=??
So	First of all we will compute Return on assets
	Return on assets (ROA) = Profit margin x Total assets turnover
	Now we will use further formulas of
	Profit margin = Net income / sales
	Total assets turnover =Sales/ Total assets
	Return on assets (ROA) = Profit margin x Total assets turnover
	Return on assets (ROA) = (Net income / sales) x (Sales/ Total assets )
	Return on assets (ROA) = Net income / Total assets
	Return on assets (ROA) = $82,490 / $1,089,500
	Return on assets (ROA) = 0.07571363
At last	Internal growth rate = (ROA x b) /(1-(ROA x b))
	Internal growth rate = (0.07571363 x 0.70) /(1-(0.07571363 x 0.70))
	Internal growth rate =0.055965697
	Internal growth rate =5.5965697%
	Internal growth rate =5.60%
Please feel free to ask if anything about above solution in comment section of the question.