Mercantile Co. has net income of $3,413,500 on assets of $16,109,445 and retains 55 percent of its income every year. What is the company's internal growth rate? (Do not round intermediate calculations. Round final answer to two decimal places.)

Question

Quizplus · Accepted Answer

The formula for internal growth rate is (ROA x retention ratio)/(1 - ROA x retention ratio).

ROA (return on assets) = Net Income/Total Assets = $3,413,500/$16,109,445 = 0.212

Retention ratio = 55% = 0.55

Plug in the values: (0.212 x 0.55)/(1 - 0.212 x 0.55) = 0.1165 or 11.65%

Therefore, the internal growth rate of Mercantile Co. is 11.65%. The best choice is C.