Question

You are given the following information for Zonama Inc. for the fiscal year ending December, 2018: Sales is $232,887 million, Net Income is $10,073 million, Total Assets is $162,648 million, Shareholders’ equity is $143,549 million, and the firm pays out 30 percent of net income as dividends. Calculate the internal growth rate (IGR). Can the firm grow at 5 percent without raising funds externally?   

1.89 percent; No, because 5 percent < Internal Growth Rate

1.89 percent; Yes, because 5 percent < Internal Growth Rate

4.53 percent; Yes, because 5 percent > Internal Growth Rate

4.53 percent; No, because 5 percent > Internal Growth Rate

5.17 percent; Yes, because 5 percent < Internal Growth Rate

Answer 1

Answer is “4.53 percent; No, because 5 percent > Internal Growth Rate”

Return on Assets, ROA = Net Income / Total Assets
Return on Assets, ROA = $10,073 million / $162,648 million
Return on Assets, ROA = 0.06193

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.30
Retention Ratio, b = 0.70

Internal Growth Rate = [ROE * b] / [1 - ROE * b]
Internal Growth Rate = [0.06193 * 0.70] / [1 - 0.06193 * 0.70]
Internal Growth Rate = 0.043351 / 0.956649
Internal Growth Rate = 0.0453 or 4.53%

The internal growth rate is 4.53%. No, the firm cannot grow at 5% as the internal growth rate is the maximum growth rate at which the firm can grow without external financing.