Dogs R Us reported a profit margin of 10.80 percent, total asset turnover of 0.7

Question

Dogs R Us reported a profit margin of 10.80 percent, total asset turnover of 0.78 times, debt-to-equity of 0.80 times, net income of $530,000, and dividends paid to common stockholders of $212,000. The firm has no preferred stock outstanding.

What is Dogs R Us’s internal growth rate? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Dogs R Us reported a profit margin of 10.80 percent, total asset turnover of 0.78 times, debt-to-equity of 0.80 times, net income of $530,000, and dividends paid to common stockholders of $212,000. The firm has no preferred stock outstanding.

Explanation / Answer

Internal Growth Rate (IGR) = ROA x b / (1 - ROA x b)

ROA - Return on Asset = Net Income / Total Asset = Profit Margin x Asset Turnover = 10.80% x 0.78 = 8.42%

b - Retention Ratio = 1 - Dividends / Net Income = 1 - 212,000 / 530,000 = 60%

=> IGR = 8.42% x 60% / (1 - 60% x 8.42%) = 5.32%

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