A firm has $40 million in equity and $20 million of debt,it pays dividends of 20% of net income,and has a net income of $10 million.What is the firm's internal growth rate?

Question

Quizplus · Accepted Answer

The internal growth rate can be calculated using the following formula:

Internal Growth Rate = (Retained Earnings/Total Assets) x (Total Assets/Total Equity)

Retained Earnings = Net Income - Dividends = $10 million - 20% x $10 million = $8 million

Total Assets = Equity + Debt = $40 million + $20 million = $60 million

Internal Growth Rate = ($8 million/$60 million) x ($60 million/$40 million) = 0.133 or 13.3%

Therefore, the best choice is B, with an internal growth rate of 13.3%.

A Firm Has $40 Million in Equity and $20 Million