Neal's Nails has an 11% return on assets and a 30% dividend payout ratio. What is the internal growth rate?
A) 7.11%
B) 7.70%
C) 8.34%
D) 8.46%
E) 11.99%

Question

Quizplus · Accepted Answer

The internal growth rate formula is:

Internal Growth Rate = (Return on Assets × Retention Ratio) / [1 - (Return on Assets × Retention Ratio)]

Given data:

Return on Assets = 11%

Dividend Payout Ratio = 30%

Retained Earnings Ratio = 1 - Dividend Payout Ratio = 70%

Plugging in the values:

Internal Growth Rate = (11% × 70%) / [1 - (11% × 70%)]
Internal Growth Rate = 0.077, or 7.7%

Therefore, the internal growth rate for Neal's Nails is 7.7%.

Neal's Nails Has an 11% Return on Assets and a 30