The value of the variable "b" as used in the internal growth rate formula can be computed as:
A)1 + Growth rate.
B)Total dividends/Net income.
C)1 − Dividend payout ratio.
D)Net income/Total sales.
E)1 − PE ratio.

Question

Quizplus · Accepted Answer

The internal growth rate formula is given as: Internal growth rate = (ROA x b) / [1 - (ROA x b)], where ROA is the return on assets and b is the retention ratio. The retention ratio is 1 minus the dividend payout ratio (b = 1 - dividend payout ratio). Therefore, the value of variable "b" in the internal growth rate formula can be computed as 1 minus the dividend payout ratio. Hence, the best choice is C.

The Value of the Variable "B" as Used in the Internal