Question

In: Economics

Company R has a return on assets of 12 percent, an equity multiplier of 1.6, and...

Company R has a return on assets of 12 percent, an equity multiplier of 1.6, and a dividend payout ratio of 40 percent. What is Company R's internal rate of growth?

A.7.68 percent

B.7.76 percent

C.7.90 percent

D.7.50 percent

Expert Solution

The formula of internal rate of growth = ROA * b / 1- (ROA*b)

ROA- return on asset ; given as = 12% 0r .12

b- retention ratio (1- dividend payout) ; dividend payout = 40% or .4

so retention ratio = 1-.4 = .6

putting the values in the above formula –

= .12*.6 / 1- (.12*.6)

= 0.072 / 1 - 0.072

= 0.072/0.928

= 0.07758 (converting it into percentage 7.76%)

So the company R’s internal rate of growth is 7.76%

Right answer is B. 7.76 percent

* hope the answer is clear to you. please give feedback

Rahul Sunny answered 2 years ago

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