Question 21 Given the financial statements below for Dragonfly Enterprises, what
ID: 2419122 • Letter: Q
Question
Question 21
Given the financial statements below for Dragonfly Enterprises, what would be the internal growth rate (IGR) if the company decided to change the dividend payout rate to 46.4%? Enter your answer as the nearest tenth of a percent (e.g., 12.3), but do not include the % sign.
Dragonfly Enterprises
Income Statement ($ Million)
2011
Sales
370
Cost of Goods Sold
226
Selling, General, & Admin Exp.
62
Depreciation
20
Earnings Before Interest & Taxes
62
Interest Expense
12
Taxable Income
50
Taxes at 40%
20
Net Income
30
Balance Sheets as of 12-31
Assets
2010
2011
Cash
10
10
Account Receivable
46
50
Inventory
43
45
Total Current Assets
99
105
Net Fixed Assets
166
195
Total Assets
265
300
Liabilities and Owners Equity
2010
2011
Accounts Payable
26
30
Notes Payable
0
0
Total Current Liabilities
26
30
Long-Term Debt
140
150
Common Stock
22
22
Retained Earnings
77
98
Total Liab. and Owners Equity
265
300
Dragonfly Enterprises
Income Statement ($ Million)
2011
Sales
370
Cost of Goods Sold
226
Selling, General, & Admin Exp.
62
Depreciation
20
Earnings Before Interest & Taxes
62
Interest Expense
12
Taxable Income
50
Taxes at 40%
20
Net Income
30
Balance Sheets as of 12-31
Assets
2010
2011
Cash
10
10
Account Receivable
46
50
Inventory
43
45
Total Current Assets
99
105
Net Fixed Assets
166
195
Total Assets
265
300
Liabilities and Owners Equity
2010
2011
Accounts Payable
26
30
Notes Payable
0
0
Total Current Liabilities
26
30
Long-Term Debt
140
150
Common Stock
22
22
Retained Earnings
77
98
Total Liab. and Owners Equity
265
300
Explanation / Answer
Internal Growth Rate = Retained Earnings / Total Assets
IRG = (ROA x b)/1-(ROA x b)
ROA( Retuen On Asset) = 30/300= 0.10
ROA x b = 0.10 x (1-0.464) = 0.0536
IRG = 0.0536/(1-0.0536) = 5.66%
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