Internal Growth Rate Last year Umbrellas Unlimited Corporation had an ROA of 10 percent and a dividend payout ratio of 50 percent.What is the internal growth rate?
A)1.00 percent
B)2.25 percent
C)5.26 percent
D)100.00 percent

Question

Quizplus · Accepted Answer

The formula for the internal growth rate is:
Internal Growth Rate = (ROA x Retention Ratio) / (1 - ROA x Retention Ratio)
Retention ratio = 1 - Payout ratio
Given, ROA = 10% and Payout Ratio = 50%, therefore Retention Ratio = 50%
Substituting the values in the formula:
Internal Growth Rate = (10% x 50%) / (1 - 10% x 50%)
Internal Growth Rate = 0.05 / 0.95
Internal Growth Rate = 0.0526 or 5.26% (rounded to two decimal places)

Internal Growth Rate Last Year Umbrellas Unlimited Corporation Had an ROA