Last year Umbrellas Unlimited Corporation had an ROA of 10 percent and a dividend payout ratio of 50 percent. What is the internal growth rate?
A) 1.00 percent
B) 2.25 percent
C) 5.26 percent
D) 100.00 percent

Question

Quizplus · Accepted Answer

The internal growth rate can be calculated using the formula: Internal Growth Rate = (ROA * Retention Ratio) / (1 - (ROA * Retention Ratio)). Given ROA = 10% or 0.10, and the dividend payout ratio is 50%, the retention ratio is 1 - 0.50 = 0.50 or 50%. Plugging these values into the formula gives: Internal Growth Rate = (0.10 * 0.50) / (1 - (0.10 * 0.50)) = 0.05 / 0.95 = 0.05263 or 5.26%.

Last Year Umbrellas Unlimited Corporation Had an ROA of 10