A firm has $50 million in equity and $20 million of debt,it pays dividends of 30% of net income,and has a net income of $10 million.What is the firm's internal growth rate?

Question

Quizplus · Accepted Answer

Internal growth rate = (ROA x plowback ratio) / [1 - (ROA x plowback ratio)],

where ROA = net income / total assets,

plowback ratio = (1 - dividend payout ratio), and

dividend payout ratio = dividends / net income.

ROA = $10 million / ($50 million + $20 million) = 12.5%.

Dividend payout ratio = 30% / $10 million = 3%.

Plowback ratio = 1 - 3% = 97%.

Internal growth rate = (0.125 x 0.97) / [1 - (0.125 x 0.97)] = 10%.

A Firm Has $50 Million in Equity and $20 Million