Question

Gilmore, Inc., had equity of $145,000 at the beginning of the year. At the end of the year, the company had total assets of $300,000. During the year, the company sold no new equity. Net income for the year was $31,000 and dividends were $3,800.

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.)

Kindly note that the answer is not 9.50%, nor 11.07%

Answer 1

The internal growth rate =plowback ratio*ROA/(1-Plowback ratio*ROA)

here dividend=$3,800

Earnings =$31,000

Net income -Dividend paid we get Retained Earnings =$31,000-3800=$27,200

Plow back ratio =Retained earnings/Net income

Retained earnings =27,200

Net income=$31,000

SO plow back ratio =$27200/31000=.877419

Return on assets =Net Income /Assets

assets =$300,000

Net Income =$31,000

So the Return on assets =$31,000/$300,000=.10333

SO internal growth rate =Plow back ratio*ROA/1-(Plow back ratio*ROA)

.877419*.10333/1-(.877419*.10333)=9.97%