United Financial Corp had a return on equity of 15%.The corporation's earnings per share was $6.00,its dividend payout ratio was 40% and its profit-retention rate was 60%.If these relationships continue,what will be United Financial Corp's internal growth rate?

Question

Quizplus · Accepted Answer

Internal growth rate can be calculated using the following formula:

Internal Growth Rate = Retention Rate × Return on Equity

Here, Retention rate = 60%, Return on Equity = 15%

Internal growth rate = 60% × 15% = 9%

However, since the corporation's dividend payout ratio is 40%, the actual growth rate will be lower than the internal growth rate.

Actual growth rate = Internal growth rate × (1 - Dividend Payout Ratio)

= 9% × (1 - 0.4)

= 5.4%

But the choices given do not include the option of 5.4%. The closest option is B) 8.6%.

United Financial Corp Had a Return on Equity of 15