Last year Poncho Villa Corporation had an ROA of 16 percent and a dividend payout ratio of 25 percent. What is the internal growth rate?

Question

Quizplus · Accepted Answer

The internal growth rate can be calculated using the formula: Internal Growth Rate = (ROA * Retention Ratio) / (1 - (ROA * Retention Ratio)), where the Retention Ratio is 1 minus the Dividend Payout Ratio. Given an ROA of 16% (or 0.16) and a Dividend Payout Ratio of 25% (or 0.25), the Retention Ratio is 1 - 0.25 = 0.75. Plugging these values into the formula gives: Internal Growth Rate = (0.16 * 0.75) / (1 - (0.16 * 0.75)) = 0.12 / (1 - 0.12) = 0.12 / 0.88 = 0.1364 or 13.64%.

Last Year Poncho Villa Corporation Had an ROA of 16