The most recent financial statements for Live Co. are shown here: Income Stateme

Question

The most recent financial statements for Live Co. are shown here:

Income Statement Balance Sheet Sales $3,700 Current assets $3,933 Debt $7,863 Costs 2,442 Fixed assets 9,628 Equity 5,698 Taxable income $1,258 Total $13,561 Total $13,561 Taxes (34%) 428 Net income $830 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 32 percent dividend payout ratio. No external equity financing is possible. Required: What is the internal growth rate?

A. 4.24%

B. 11%

C. 4.34%

D. 2%

E. 4.44%   

Explanation / Answer

Live Co All Amounts in $ Total Assets = $ 13,561 Net Income = $ 1,258 Addition to Retained Earnings = 68% of $ 1,258 = 855 $ From the formula as given in Subjectmoney.com, the Internal Growth Rate is calculated as : ROA = 9% Retention Ratio = 68% Hence, the internal growth rate is 10% Since the closest answer to this is 11%, hence that is to be considered as the correct solution.

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