Internal Growth Rate Last year Poncho Villa Corporation had an ROA of 16 percent and a dividend payout ratio of 25 percent.What is the internal growth rate?
A)1.19 percent
B)13.64 percent
C)25.40 percent
D)33.33 percent

Question

Quizplus · Accepted Answer

Internal Growth Rate (IGR) = (ROA x Retention ratio) / (1 - ROA x Retention ratio)
Retention ratio = 1 - Dividend payout ratio = 1 - 0.25 = 0.75
IGR = (0.16 x 0.75) / (1 - 0.16 x 0.75) = 0.12 or 12%
Therefore, the internal growth rate is 12%. The closest answer choice is B, which is 13.64%.

Internal Growth Rate Last Year Poncho Villa Corporation Had an ROA