Question

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

Statement of Comprehensive Income				Statement of Financial Position
Sales	$	14,200		Current Assets	$	11,100		Debt	$	15,600
Costs		8,500		Fixed Assets		26,750		Equity		22,250
Taxable Income	$	5,700		Total	$	37,850		Total	$	37,850
Taxes (40%)		2,280
Net Income	$	3,420

Assets and costs are proportional to sales. Debt and equity are not. Burnaby maintains a constant 40 percent dividend payout ratio. No external equity financing is possible.

What is the internal growth rate? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Internal growth rate

%

Answer 1

Solution:
	Internal growth rate	5.73%
Working Notes:
	Return on assets (ROA) = Net income (NI) /Total assets ( TA)
	Return on assets (ROA) = 3,420/37,850
	Return on assets (ROA) = 0.09035667107
	plowback ratio ( b) = 1- payout ratio
	plowback ratio ( b) = 1- 0.40
	plowback ratio ( b) = 0.60
	Internal growth rate = (ROA x b) / [1-(ROA x b)]
	Internal growth rate = ( 0.09035667107 x 0.60) / (1-( 0.09035667107 x 0.60))
	Internal growth rate = 0.057321638
	Internal growth rate = 5.73%
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