Question

Gilmore, Inc., had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $305,000. During the year, the company sold no new equity. Net income for the year was $32,000 and dividends were $4,000.

a. Calculate the internal growth rate for the company. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the internal growth rate using ROA × b for beginning of period total assets. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. Calculate the internal growth rate using ROA × b for end of period total assets. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a)Calculation of internal growth rate for the company:

Internal growth rate=(Retrun on Assets*Retention ratio)/[1-(Retrun on Assets*Retention ratio)]

Retrun on Assets=Net Income/Total Assets

=$32,000/$305,000

=0.1049

Retention ratio(b)=[Dividend/Net Income]

=[$4,000/$32,000]

=0.125

Internal growth rate=(0.1049*0.125)/[1-(0.1049*0.125)]

=0.0133 or 1.33%

b)Calculation of internal growth rate using  beginning of period total assets

Beginning of period total assets=Ending total assets-Retained earning

=$305,000-($32,000-$4,000)

=$277,000

Internal Growth rate=ROA × b

ROA=Net Income/Begining Total Assets

=$32,000/$277,000

=0.1155

Internal Growth rate=0.1155*0.125

=0.0144 or 1.44%

c)Calculation of internal growth rate using ending of period total assets:

Ending of period total assets=$305,000

ROA=0.1049

b=0.125

Internal growth rate=ROA*b

=0.1049*0.125

=0.0131 or 1.31%