The most recent financial statements for Live Co. are shown here: Income Stateme
ID: 2808715 • Letter: T
Question
The most recent financial statements for Live Co. are shown here: Income Statement Balance Sheet Sales $4,200 Current assets $4,464 Debt $8,926 Costs 2,772 Fixed assets 10,930 Equity 6,468 Taxable income $1,428 Total $15,394 Total $15,394 Taxes (33%) 471 Net income $957 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 16 percent dividend payout ratio. No external equity financing is possible. Required: What is the internal growth rate? (Do not round your intermediate calculations.)
Explanation / Answer
Internal Growth Rate = [ROA x B] / [1 – (ROA x B)]
Where, ROA = Return on Assets
B = Retention Ratio
Return on Assets [ROA] = [Net Income / Total Assets] x 100
= [$957 / 15,394] x 100
= 6.22%
Retention Ratio (B) = 1 - Dividend Pay-out ratio
= 1 – 0.16
= 0.84 or 84%
Internal Growth Rate = [ROA x B] / [1 – (ROA x B)]
= [0.0622 x 0.84] / [1 – (0.0622 x 0.84)]
= [0.0522 / 0.9478]
= 5.51%
“Therefore, The Internal Growth Rate for the Live Co = 5.51%”