Last year Foley Inc. reported net fixed assets of $400, net working capital of $100, net income of $120, dividends of $70, and earnings retained in the period of $50. What is Foley Inc.'s internal growth rate?

Question

Quizplus · Accepted Answer

The internal growth rate formula is:

Internal Growth Rate = (Earnings Retained ÷ Total Assets) × (1 − Dividend Payout Ratio)

Total assets = Net fixed assets + Net working capital = $400 + $100 = $500

Dividend payout ratio = Dividends ÷ Net income = $70 ÷ $120 = 0.583

Internal Growth Rate = ($50 ÷ $500) × (1 − 0.583) ≈ 0.10 or 10.0%

Therefore, the best choice is C.

Last Year Foley Inc