Moulton Incorporated has a 10% return on assets and a 20% dividend payout ratio. What is the internal growth rate?
A) 8.2%
B) 8.7%
C) 9.4%
D) 10%
E) None of these.

Question

Quizplus · Accepted Answer

The formula for internal growth rate is [(return on assets x retention ratio)] / [(1 - return on assets x retention ratio)], where retention ratio is 1 - payout ratio.

In this case, retention ratio is 1 - 20% = 80%, and return on assets is 10%.

Plugging these values into the formula:

[(0.10 x 0.80)] / [(1 - (0.10 x 0.80))] = 0.087 or 8.7%

Therefore, the internal growth rate for Moulton Incorporated is 8.7%.

Moulton Incorporated Has a 10% Return on Assets and a 20