Question

The most recent financial statements for Live Co. are shown here: Income Statement Sales $18801 Costs $10361 Taxable Income ? Taxes (40%) ? Net Income ? Balance Sheet Current Asset $13198 Debt $18918 Fixed Asset $31869 Equity ? Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 28 percent dividend payout ratio. No external financing is possible. What is the internal growth rate (in %)?

Answer 1

Internal Growth rate	=	8.80%
Workings:
Internal Growth rate	=	[(ROA X B) / 1 - (ROA - B)]
Where,
ROA	=	Return on Equity
B	=	Retention ratio
Sales	=	$       18,801
Cost	=	$       10,361
Gross Income	=	$         8,440
Tax @ 40%	=	$         3,376
Net Income	=	$         5,064
Current Assets	=	$       13,198
Fixed Assets	=	$       31,869
Total Assets	=	$       45,067
B	=	1 - Dividend pay out ratio
	=	1 - 0.28
	=	72%
ROA	=	Net Income / Total Assets
	=	$5064 / $45067
	=	11.24%
Internal Growth rate	=	[(ROA X B) / 1 - (ROA - B)]
	=	[(11.24% X 72%) / 1 - (11.24% X 72%)]
	=	8.80%