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

Question

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The internal growth rate (IGR) is calculated using the formula: IGR = (ROA * Retention Ratio) / (1 - ROA * Retention Ratio). First, calculate the Return on Assets (ROA) = Net Income / Total Assets = $1,212,335 / $12,522,788 = 0.0968 or 9.68%. The retention ratio is 70% or 0.70. Plug these into the IGR formula: IGR = (0.0968 * 0.70) / (1 - 0.0968 * 0.70) = 0.068 or 6.8%.

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