Question

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

Income Statement				Balance Sheet
Sales	$	17,800		Current assets	$	11,300		Debt	$	15,800
Costs		13,100		Fixed assets		27,250		Equity		22,750
Taxable income	$	4,700		Total	$	38,550		Total	$	38,550
Taxes (40%)		1,880
Net income	$	2,820

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 20 percent dividend payout ratio. No external financing is possible.

What is the internal growth rate?

Answer 1

ROA = Net income / Total assets

         = $2,820 / $38,550

         = 0.073

Retention ratio (R) = 1 – Dividend payout ratio

                             = 1 – 0.20

                             = 0.80

IGR = [(ROA × R) / {1 – (ROA × R)}] × 100

       = [(0.073 × 0.80) / {1 – (0.073 × 0.80)}] × 100

       = [0.0584 / (1 – 0.0584)] × 100

       = [0.0584 / 0.9416] × 100

       = 0.0620 × 100

       = 6.20% (Answer)