Question

The most recent financial statements for Shinoda Manufacturing Co. are shown below:

Income Statement			Balance Sheet
Sales	$	63,800	Current assets	$	26,000	Debt	$	42,200
Costs		44,880	Fixed assets		78,900	Equity		62,700
Taxable income	$	18,920	Total	$	104,900	Total	$	104,900
Tax (35%)		6,622
Net Income	$	12,298

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 39 percent dividend payout ratio. No external financing is possible.

Required:

What is the internal growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Internal growth rate

%

Answer 1

Internal growth rate is defined as the maximum growth a company can achive without relying on external source of finance.

In other words , it is the maximum rate of growth in sales and assets that a company can achieve using only retained earnings.

The formula to calculate internal growth rate is as under,

Internal Growth Rate = Retention rate * ROA

ROA = Return on assets = Net Income / Total assets = $12298 / $104900 = 11.72%

b = Retention ratio = 1 - dividend payout ratio = 1 - 0.39 = 0.61

Internal Growth Rate = 0.61 * 11.72%

Internal Growth Rate = 7.15%

answered by: anonymous