Go Go Industries is growing at 35% per year. It is all-equity-financed and has t

Question

Go Go Industries is growing at 35% per year. It is all-equity-financed and has total assets of $1 million. Its return on equity is 20%. Its plowback ratio is 50%. a. What is the internal growth rate? (Enter your answer as a percent rounded to 2 decimal places.) Internal growth rate % b. What is the firm’s need for external financing this year? (Enter your answer in dollars not in millions. Do not round intermediate calculations.) External financing $ c. By how much would the firm increase its internal growth rate if it reduced its payout ratio to zero? (Enter your answer as a whole percent.) Internal growth rate % d. Calculate the revised required external financing. (Enter your answer in dollars not in millions. Do not round intermediate calculations.) External financing $

Explanation / Answer

Internal Growth Rate= Return on Asset*b/1-(Return on Asset*b)

b= Retention Ratio

Internal Growth Rate= 0.20*50%/1-(0.20*.5)

=0.10/0.90

=11.11%

(b) Company will grow at 35% so assets will be increased by 3.5 Lacs and 11.11% is the Internal Growth Rate means out of 350000 1,11,100 will be financed by internal growtha and remaining $238900 will be externally financed.

(c) If the Firm reduced payout to Zero then Internal growth rate will be

= 0.20*100%/1-(0.20*100%)

= 0.20/0.80

=25%

(d) revised External fiancing will be $350000-$250000= $100000

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