Question

For 2012, Nathan's Food Stop reported a net income of $33,450 and total equity of $68,600....

For 2012, Nathan's Food Stop reported a net income of $33,450 and total equity of $68,600. Nathan's debt-equity ratio is 0.65 and payout ratio is 30 percent. What is Nathan's internal growth rate? 22.48 percent 31.04 percent 26.08 percent 39.88 percent 35.96 percent

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Answer #1
Ans. Option 3rd    26.08%
Internal growth rate   =   (Return on assets * Retention ratio) / (1 - Return on assets * Retention ratio)
(0.2955 * 0.70) / (1 - 0.2955 * 0.70)
0.20685 / (1 - 0.20685)
0.20685 / 0.79315
0.260796
or   26.08%
*Calculations:
Debt equity ratio = Debt / Equity
0.65 = Debt / $68,600
Debt = $68,600 * 0.65
$44,590
Total assets = Debt + Equity
$44,590 + $68,600
$113,190
Return on assets (R O A)   =   Net income / Total assets * 100
$33,450 / $113,190 * 100
29.55%
Retention ratio   =   1 - Payout ratio
1 - 0.30
0.70
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