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. Internal growth rate % Calculate the internal growth rate using ROA times b for beginning of period total assets. Beginning of period assets % Calculate the internal growth rate using ROA times b for end of period total assets. End of period assets %

Explanation / Answer

Internal growth rate = (ROA X b)/(1 - (ROA X b))

ROA = Return on Assets = Net income/Total assets = $45,000/$370,000 = 0.12162

b = Retention ratio

Net income = $45,000

Dividend = $6,600

b = Retention ratio = (Net Income - Dividends)/Net Income = ($45,000 - $6,600)/$45,000 = 0.85333

Internal growth rate = (0.12162 X 0.85333)/(1-(0.12162 X 0.85333) = 0.1158 = 11.58%

Internal growth rate using ROA X b for beginning period of total assets

Beginning assets = Ending assets - Addition to retained earnings

Ending assets = $370,000

Addition to retained earnings = Net income - Dividend = $45,000 - $6,600 = $38,400

Beginning assets = $370,000 - $38,400 = $331,600

ROA using beginning period of total assets:

ROA = Return on Assets = Net income/Total assets = $45,000/$331,600 = 0.13570

Internal growth rate = ROA X b = 0.13570 X 0.853333 = 0.11580 = 11.58%

Internal growth rate using ROA X b for end of period total assets

Internal growth rate = ROA X b = 0.12162 X 0.853333 = 0.10378 = 10.38%

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