Question

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

Income Statement		Balance Sheet
Sales	$3,900	Current assets	$4,145	Debt	$8,288
Costs	2,574	Fixed assets	10,149	Equity	6,006
Taxable income	$1,326	Total	$14,294	Total	$14,294
Taxes (33%)	438
Net income	$888

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 18 percent dividend payout ratio. No external equity financing is possible.

Required:

What is the internal growth rate? (Do not round your intermediate calculations.)

Answer 1

Given,

Total assets = current assets + fixed assets

= 4145 + 10149

= 14294$

Net income = 888$

Return on assets = Net income/Total assets

= 888/14294

= 0.0621 or 6.21%

Dividend payout ratio = 18%

Retention ratio = 1-dividend payout ratio

= 1- 0.18

= 0.82

Therefore,

Internal growth rate = Retention ratio*return on assets/1-retention ratio*return on assets

= 0.82 * 6.21/1-0.82*6.21

= 5.0922/1-0.050922

= 5.0922/0.949078

= 5.365 or 5.37%