[Solved] How to calculate internal growth rate

[leslie052581]

Problem 4-6 Calculating Internal Growth [LO3]​

The most recent financial statements for Mandy Company are shown here:

Income Statement	Balance Sheet
Sales	$ 20,100	Current assets	$ 11,940	Debt	$ 16,420
Costs	13,800	Fixed assets	31,500	Equity	27,020
Taxable income	$ 6,300	Total	$ 43,440	Total	$ 43,440
Taxes (21%)	1,323
Net income	$ 4,977

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 45 percent dividend payout ratio. What is the internal growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded 2 decimal places, e.g., 32.16.)

internal growth rate %

 

[Ridwan]

Problem 4-6 Calculating Internal Growth [LO3]​

The most recent financial statements for Mandy Company are shown here:

Income Statement	Balance Sheet
Sales	$ 20,100	Current assets	$ 11,940	Debt	$ 16,420
Costs	13,800	Fixed assets	31,500	Equity	27,020
Taxable income	$ 6,300	Total	$ 43,440	Total	$ 43,440
Taxes (21%)	1,323
Net income	$ 4,977

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 45 percent dividend payout ratio. What is the internal growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded 2 decimal places, e.g., 32.16.)

internal growth rate %

Hello Leslie,
Thanks for your post. To calculate the internal growth rate, you can use the following formula:

Internal Growth Rate = (Retained Earnings / Total Assets) * (1 + Dividend Payout Ratio)

First, calculate the retained earnings. Retained earnings are the portion of the net income not paid out as dividends:

Retained Earnings = Net Income * (1 - Dividend Payout Ratio)
= $4,977 * (1 - 0.45) = = $2,737.35

Now, calculate the internal growth rate:

Internal Growth Rate = ($2,737.35 / $43,440.00) * (1 + 0.45) = = 0.091205 = = 9.12%



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ExcelDemy Team