Question

The most recent financial statements for Live Co. are shown here:

Income Statement		Balance Sheet
Sales	$4,000	Current assets	$4,252	Debt	$8,501
Costs	2,640	Fixed assets	10,409	Equity	6,160
Taxable income	$1,360	Total	$14,661	Total	$14,661
Taxes (33%)	449
Net income	$911

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 22 percent dividend payout ratio. No external equity financing is possible. What is the fastest rate at which the company can grow if only internal financing is used? (Do not round your intermediate calculations.)

HINT: You must know the difference between IGR and SGR.

MULTIPLE CHOICE

• 5.19%

• 1.39%

• 5.09%

• 13.04%

• 4.99%

Answer 1

Return on Assets (ROA)

Return on Assets (ROA) = [Net Income / Total Assets] x 100

= [$911 / $14,661] x 100

= 6.213764%

Retention ratio

Retention ratio = 100% – Dividend pay-out ratio

= 100% - 22%

= 78%

Internal Growth Rate (IGR)

Internal Growth Rate (IGR) = [ROA x Retention ratio] / [1 – (ROA x Retention ratio)]

= [0.06213764 x 0.78] / [1 – (0.06213764 x 0.78)]

= 0.0484674 / [1 - 0.0484674]

= 0.0484674 / 0.9515326

= 0.050936 or

= 5.09% (Rounded to 2 decimal place)

Hence, the rate at which the company can grow if only internal financing is used will be 5.09%