Cold Ice has a profit margin of 8.3 percent and a payout ratio of 42 percent. The firm has annual sales of $386,400, current liabilities of $37,200, long-term debt of $123,800, and net working capital of $16,700, and net fixed assets of $391,500. No external equity financing is possible. What is the internal growth rate?

Question

Quizplus · Accepted Answer

The internal growth rate can be calculated using the formula: Internal Growth Rate = (ROA * b) / (1 - ROA * b), where ROA is Return on Assets and b is the retention ratio (1 - payout ratio). First, calculate the net income: Profit Margin = Net Income / Sales, so Net Income = Profit Margin * Sales = 0.083 * $386,400 = $32,071.20. Then, calculate the total assets: Total Assets = Current Liabilities + Long-term Debt + Net Working Capital + Net Fixed Assets = $37,200 + $123,800 + $16,700 + $391,500 = $569,200. Next, find ROA: ROA = Net Income / Total Assets = $32,071.20 / $569,200 ≈ 0.0563. The retention ratio (b) is 1 - payout ratio = 1 - 0.42 = 0.58. Finally, calculate the internal growth rate: Internal Growth Rate ≈ (0.0563 * 0.58) / (1 - 0.0563 * 0.58) ≈ 0.0436 or 4.36 percent.

Cold Ice Has a Profit Margin of 8