Cambria, Inc., had equity of $215,000 at the beginning of the year. At the end o

Question

Cambria, Inc., had equity of $215,000 at the beginning of the year. At the end of the year, the company had total assets of $370,000. During the year the company sold no new equity. Net income for the year was $45,000 and dividends were $6,600. Calculate the internal growth rate for the company. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Internal growth rate % Calculate the internal growth rate using ROA × b for beginning of period total assets. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Beginning of period assets % Calculate the internal growth rate using ROA × b for end of period total assets. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) End of period assets %

Explanation / Answer

Internal Growth Rate = (ROA X b) / 1 - (ROA X b)

ROA= Return of Assets on the basis of beginning of period total assets = 45000 / 215000 = 0.2093023

ROA= Return of Assets on the basis of end of period total assets = 45000 / 370000 = 0.1216216

Dividend Pay Out Ratio = 6600 / 215000 = 0.0306976

Retantion Ratio = b = ( 1 - div pay out ratio ) = 1 - 0.0306976 = 0.9693024

THEREFORE, INTERNAL GROWTH RATE ON THE BASIS OF ROA X b FOR THE BEGINNING OF PERIOD TOTAL ASSETS = ( ROA X b ) / 1 - ( ROA X b)

   = 0.2093023 X 0.9693024 / 1 - ( 0.2093023 X 0.9693024 )

= 0.2028772 / 0.7971228 = 0.2545118 i.e 25.45 % (approx)

THEREFORE, INTERNAL GROWTH RATE ON THE BASIS OF ROA X b FOR THE END OF PERIOD TOTAL ASSETS = ( ROA X b ) / 1 - ( ROA X b)

= (0.1216216 X  0.9693024) / 1 - (0.1216216 X  0.9693024)

= 0.1178881 / 0.8821119 = 0.133643 i.e 13.36 % (approx)

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