Southland Tours has net income of $2 million this year.The book value of Southland Tours common equity is $8 million dollars.The company's dividend payout ratio is 60% and is expected to remain this way.What is Southland Tours' internal growth rate?

Question

Quizplus · Accepted Answer

The formula for internal growth rate is:

Internal Growth Rate = Retention Ratio x Return on Equity

Retention ratio = 1 - Dividend payout ratio = 1 - 0.6 = 0.4

Return on Equity = Net Income / Book Value of Equity = 2,000,000 / 8,000,000 = 0.25

Internal Growth Rate = 0.4 x 0.25 = 0.1 or 10%

Therefore, the correct answer is C) 10%.

Southland Tours Has Net Income of $2 Million This Year