A firm reported a profit margin of 8.5 percent, total asset turnover of 0.85 times, debt-to-equity ratio of 0.90 times, net income of $550,000, and dividends paid to common stockholders of $100,000. The firm has no preferred stock outstanding. What is the firm's internal growth rate?
A) 3.61 percent
B) 6.29 percent
C) 5.91 percent
D) 11.04 percent

Question

Quizplus · Accepted Answer

The internal growth rate (IGR) is calculated using the formula: IGR = (ROA * Retention Ratio) / (1 - ROA * Retention Ratio). ROA (Return on Assets) is Net Income / Total Assets. Retention Ratio is (Net Income - Dividends) / Net Income. Given the profit margin and total asset turnover, ROA = Profit Margin * Total Asset Turnover = 0.085 * 0.85 = 0.07225. Retention Ratio = (550,000 - 100,000) / 550,000 = 0.8182. Plug these into the IGR formula to get approximately 6.29 percent.

A Firm Reported a Profit Margin of 8