Question

Leash N Collar reported a profit margin of 9.4%, total asset turnover ratio of 2.9 times, debt-to-equity ratio of 0.89 times, net income of $540,000, and dividends paid to common stockholders of $340,000. The firm has no preferred stock outstanding. What is Leash N Collar's internal growth rate?

Answer 1

Leash N Collar's internal growth rate is computed as shown below:

= Return on Asset x ( 1 - dividend payout ratio ) / [ 1 - Return on Asset x ( 1 - dividend payout ratio ) ]

Return on Asset is computed as follows:

= Net Income / Assets

Sales is computed as follows:

Sales = Net Income / profit margin

= $ 540,000 / 0.094

= $ 5,744,680.851

Assets will be as follows:

Assets = Sales / Total Asset turnover ratio

= $ 5,744,680.851 / 2.9

= $ 1,980,924.431

So the return on assets will be:

= $ 540,000 /  $ 1,980,924.431

= 27.26% or 0.2726

Dividend payout ratio is computed as follows:

= Dividend / Net Income

= $ 340,000 / $ 540,000

= 0.6296 Approximately

So the internal growth rate will be:

= ( 0.2726 x 0.6296 ) / [ 1 - ( 0.2726 x 0.6296 ) ]

= 20.72% Approximately

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