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

Question

Quizplus · Accepted Answer

The internal growth rate is calculated as the retention ratio multiplied by the return on equity. The retention ratio is 1 - dividend payout ratio = 1 - 0.6 = 0.4. The return on equity is net income divided by book value of equity = $2 million / $8 million = 0.25. Therefore, the internal growth rate is 0.4 * 0.25 = 0.10 or 10%.

Greenland Airlines Has Net Income of $2 Million This Year