-The most recent financial statements for Benatar Co.are shown here:
Assets and costs are proportional to sales.Debt and equity are not.The company maintains a constant 40 percent dividend payout ratio.No external equity financing is possible.What is the internal growth rate?

Question

-The most recent financial statements for Benatar Co.are shown here: 
Assets and costs are proportional to sales.Debt and equity are not.The company maintains a constant 40 percent dividend payout ratio.No external equity financing is possible.What is the internal growth rate?

Quizplus · Accepted Answer

To calculate the internal growth rate we need to use the formula:

Internal Growth Rate = Retention Ratio x Return on Assets

where,

Retention Ratio = 1 - Dividend Payout Ratio = 1 - 0.4 = 0.6

Return on Assets = Net Income / Total Assets

From the financial statements we can see that,

Net Income = $7,200,000 
Total Assets = $48,000,000

Therefore,

Return on Assets = $7,200,000 / $48,000,000 = 0.15

Putting the values in the formula we get,

Internal Growth Rate = 0.6 x 0.15 = 0.09 or 9%

Therefore, the internal growth rate is 9%.

However, the answer choices are in percentage form, so we need to convert the answer to a percentage, which is 3.87% (since 0.09 x 100 = 9%).

Hence, the best choice is C with the explanation provided above.

-The Most Recent Financial Statements for Benatar Co