What is the addition to retained earnings if Stansﬁeld grows at the internal growth rate? (Assume the dividend payout ratio is ﬁxed.)
A) $5.8 million
B) $13.3 million
C) $23.3 million
D) $24.9 million

Question

What is the addition to retained earnings if Stansﬁeld grows at the internal growth rate? (Assume the dividend payout ratio is ﬁxed.)
A) $5.8 million 
B) $13.3 million 
C) $23.3 million 
D) $24.9 million

Quizplus · Accepted Answer

The internal growth rate formula is (ROA x b)/(1 - ROA x b), where ROA is return on assets and b is the retention rate. In this case, ROA is 9% and the dividend payout ratio is fixed. Therefore, the retention rate is (1 - dividend payout ratio) = 0.6. Plugging these numbers into the formula, we get (0.09 x 0.6) / (1 - 0.09 x 0.6) = 0.054, or 5.4%. The addition to retained earnings is the internal growth rate multiplied by the beginning retained earnings balance of $430 million, which equals $23.3 million (0.054 x $430 million = $23.3 million). Therefore, the best answer is C.

What Is the Addition to Retained Earnings If Stansﬁeld Grows