Katelyn's Kites has net income of $240 and total equity of $2,000. The debt-equity ratio is 1.0 and the plowback ratio is 40%. What is the internal growth rate?
A) 2.46%
B) 3.00%
C) 4.92%
D) 5.88%
E) 6.00%

Question

Quizplus · Accepted Answer

The internal growth rate is calculated as the product of the plowback ratio and the return on equity. The return on equity is calculated as net income divided by total equity. In this case, the plowback ratio is 40% and the return on equity is 240 / 2,000 = 12%. Therefore, the internal growth rate is 0.40 * 0.12 = 0.048, or 4.8%.

Katelyn's Kites Has Net Income of $240 and Total Equity