Goldilochs Inc. reported sales of $8 million and net income of $1.5 million. The firm has $12 million in total assets and $500,000 in current liabilities. The firm currently pays out 25% of its net income to shareholders. Assume that all assets and current liabilities are expected to grow with sales. If Goldilochs does not want to rely on any external sources of funds, what is the most sales can grow (in percent)?

Question

Quizplus · Accepted Answer

First, we need to calculate the firm's current retention ratio, which is 1 - payout ratio = 1 - 0.25 = 0.75.
Next, we can use the internal growth rate formula: 
internal growth rate = (ROA x retention ratio) / (1 - ROA x retention ratio)
where ROA = net income / total assets.

Plugging in the values, we get: 
internal growth rate = ($1.5m / $12m) x 0.75 / (1 - ($1.5m / $12m) x 0.75)
= 0.125 x 0.75 / (1 - 0.125 x 0.75)
= 0.0938 or 9.38%

Therefore, the maximum sales growth rate without relying on external funds is 9.38%. However, we can see that only answer choice B (10.84%) is close to this value, so it is the best choice.