Pizza Piatta has net income of $680 and total equity of $4,000. The debt-equity ratio is 1.0 and the payout ratio is 40 percent. What is the internal growth rate?

Question

Quizplus · Accepted Answer

The internal growth rate (IGR) can be calculated using the formula: IGR = (ROE * (1 - payout ratio)) / (1 + (ROE * (1 - payout ratio))). First, calculate the Return on Equity (ROE) = Net Income / Equity = $680 / $4,000 = 0.17 or 17%. The retention ratio is 1 - payout ratio = 1 - 0.40 = 0.60. Plug these into the IGR formula: IGR = (0.17 * 0.60) / (1 + (0.17 * 0.60)) = 0.102 / 1.102 = 0.093 or 9.3%. However, since the debt-equity ratio is 1.0, the equity multiplier is 2, which affects the growth rate calculation, leading to an IGR of approximately 5.37%.

Pizza Piatta Has Net Income of $680 and Total Equity