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.

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

Internal growth rate             %

Answer 1

Internal Growth Rate

Internal Growth Rate is calculated by using the following formula

Internal Growth Rate = [ROA x b)] / [1- (ROA x b)]

Return on Asset (ROA) = (Net Income / Total Asset) x 100

= ($12,298 / $104,900) x 100

= 11.72%

Retention Ratio (b) = 1 – Dividend payout rtaio

= 1 – 0.39

= 0.61

Therefore, the Internal Growth Rate = [ROA x b)] / [1- (ROA x b)]

= [0.1172 x 0.61] / [1 – (0.1172 x 0.61)]

= 0.0715 / [1 – 0.0715]

= 0.0715 / 0.9285

= 0.0770

= 7.70%

“Hence, the Internal Growth Rate = 7.70%”