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The most recent financial statements for Live Co. are shown here: Income Statement Sales $18801 Costs...

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Accounting

The most recent financial statements for Live Co. are shownhere: Income Statement Sales $18801 Costs $10361 Taxable Income ?Taxes (40%) ? Net Income ? Balance Sheet Current Asset $13198 Debt$18918 Fixed Asset $31869 Equity ? Assets and costs areproportional to sales. Debt and equity are not. The companymaintains a constant 28 percent dividend payout ratio. No externalfinancing is possible. What is the internal growth rate (in %)?

Answer & Explanation Solved by verified expert
3.8 Ratings (518 Votes)

Internal Growth rate = 8.80%
Workings:
Internal Growth rate = [(ROA X B) / 1 - (ROA - B)]
Where,
ROA = Return on Equity
B = Retention ratio
Sales = $       18,801
Cost = $       10,361
Gross Income = $         8,440
Tax @ 40% = $         3,376
Net Income = $         5,064
Current Assets = $       13,198
Fixed Assets = $       31,869
Total Assets = $       45,067
B = 1 - Dividend pay out ratio
= 1 - 0.28
= 72%
ROA = Net Income / Total Assets
= $5064 / $45067
= 11.24%
Internal Growth rate = [(ROA X B) / 1 - (ROA - B)]
= [(11.24% X 72%) / 1 - (11.24% X 72%)]
= 8.80%

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