Buster's Market earns a profit and has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its long-term debt at this time. Which one of the following defines the maximum rate at which this firm can currently grow?

Question

Quizplus · Accepted Answer

The internal growth rate defines the maximum rate at which a firm can grow its sales, and hence its size, using only retained earnings, without issuing new equity or increasing its debt. Since Buster's Market has a dividend payout ratio of 30 percent, it retains 70 percent of its earnings (1 - .30). However, the correct answer is simply the internal growth rate, as it directly relates to growth through retained earnings, without specifying the formula or the retention ratio in the options.

Buster's Market Earns a Profit and Has a Dividend Payout