Internal Growth Rate Last year Umbrellas Unlimited Corporation had an ROA of 10% and a dividend payout ratio of 50%. What is the internal growth rate?
A) 1.00%
B) 2.25%
C) 5.26%
D) 100.00%

Question

Quizplus · Accepted Answer

The internal growth rate formula is:

Internal growth rate = (ROA x Retention ratio) / (1 - ROA x Retention ratio)

Where:

Retention ratio = 1 - Dividend payout ratio

Plugging in the given values,

Retention ratio = 1 - 0.5 = 0.5

ROA = 0.10

Internal growth rate = (0.10 x 0.5) / (1 - 0.10 x 0.5) = 0.0526 or 5.26%

Therefore, the answer is choice C.

Internal Growth Rate Last Year Umbrellas Unlimited Corporation Had an ROA