Internal growth rate: Swan Supply Company has profit of $1,212,335 on assets of $12,522,788 and retains 70 per cent of its income every year. What is the company's internal growth rate?

Question

Quizplus · Accepted Answer

Internal growth rate can be calculated using the formula:

Internal Growth Rate = Retention Ratio x Return on Assets

Retention Ratio = Net Income / Total Income = 70% 
Return on Assets = Net Income / Total Assets = $1,212,335 / $12,522,788 = 0.0967

Internal Growth Rate = 0.7 x 0.0967 = 0.0677 = 6.8%

Therefore, the company's internal growth rate is 6.8%, which is option B.

Internal Growth Rate: Swan Supply Company Has Profit of $1,212,335