The most recent financial statements for Live Co. are shown here: Income Stateme
ID: 2741061 • Letter: T
Question
The most recent financial statements for Live Co. are shown here: Income Statement Balance Sheet Sales $ 16,400 Current assets $ 11,200 Debt $ 15,700 Costs 10,500 Fixed assets 27,000 Equity 22,500 Taxable income $ 5,900 Total $ 38,200 Total $ 38,200 Taxes (40%) 2,360 Net income $ 3,540 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. No external financing is possible. What is the internal growth rate? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
First we have to calculate the ROA.
ROA = $3,540 / $38,200 = 0.0927 or 9.27%
The payback ratio b is equal to one minus payout ratio.
b = 1 - 0.30 = 0.70
Now, Internal Growth rate = (ROA x b) / 1 - (ROA x b)
Internal Growth rate = (0.0927 x 0.70) / 1 - (0.0927 x 0.70)
Internal Growth rate = 0.06489 / 0.93511 = 0.06939 or 6.94%