Question

You’ve collected the following information about Odyssey, Inc.:

Sales		$	222,564
Net income		$	12,555
Dividends		$	7,014
Total debt		$	53,387
Total equity		$	69,215

What growth rate could be supported with no outside financing at all? (in %) (round 4 decimal places)

Answer 1

The growth rate that can be supported with no outside financing is the internal growthrate.

To calculate the internal growth rate, we first need the ROA, which is:

ROA = net income/(Toala debt + total equity) = 12555/(53387+69215) = 10.24%

This means the internal growth rate is:

Internal growth rate = (ROA × b) / [1 – (ROA × b)]

where b = retention ratio = 1 - dividend/net income = 1 - 7014/12555 = 44.13%

Internal growth rate = [.1024(.4413)] / [1 – .1024(.4413)]

=> Internal growth rate = .0473 or 4.73%