Internal growth rate: Mercantile Company 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?

Question

Quizplus · Accepted Answer

Internal growth rate = (ROA x Retention ratio) / (1 - ROA x Retention ratio)
ROA = Net Income/Total Assets = 3,413,500/16,109,445 = 0.2118
Retention ratio = 55% = 0.55
Internal growth rate = (0.2118 x 0.55) / (1 - 0.2118 x 0.55) = 11.7% 
Therefore, the company's internal growth rate is 11.7%. The correct answer is (C).

Internal Growth Rate: Mercantile Company Has Net Income of $3,413,500