Internal growth rate: Meredith, Inc., has a return on equity of 21.5 percent, an equity ratio of 55 percent, and a dividend payout ratio of 70 percent. What is the company's internal growth rate?

Question

Quizplus · Accepted Answer

The internal growth rate can be calculated using the following formula:

Internal Growth Rate = (Return on Equity × Retention Ratio) ÷ (1 − (Return on Equity × Retention Ratio))

where Retention Ratio = (1 − Dividend Payout Ratio)

Substituting the values given in the question:

Retention Ratio = (1 − 0.70) = 0.30

Internal Growth Rate = (0.215 × 0.30) ÷ (1 − (0.215 × 0.30)) = 0.036 or 3.6%

Therefore, the best choice is B.

Internal Growth Rate: Meredith, Inc