Question

In: Finance

Following is the current year data for Green Games, Inc. What are the Internal Growth Rate...

Following is the current year data for Green Games, Inc. What are the Internal

Growth Rate and the Sustainable Growth Rate for GGI?

Sales

60,000

Costs

40,000

Assets

175,000

Liabilities

75,000

Equity

100,000

Dividends

8,000

Tax rate

21%

Expert Solution

Internal growth rate is the maximum rate of growth that a company can achieve without the help of any external financing i.e. only through its retained earnings. The formula to calculate IGR is:

The idea behind the formula is that retained earnings is the amount of internal capital available to be reinvested as compared to the total size of the business (total assets).

First retained earnings need to be calculated as shown:

So,

or IGR = 4.46%

On the other hand, the formula to calculate sustainable growth rate is:

Where, the dividend payout is calculated as (dividends/net income) and Return on equity is calculated as (net income/Total equity)

or SGR = 7.8%

jeff jeffy answered 1 year ago

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