The most recent financial statements for Schenkel Co. are shown here: Income Sta

Question

The most recent financial statements for Schenkel Co. are shown here: Income Statement Balance Sheet Sales $ 14,000 Current assets $ 10,500 Debt $ 15,000 Costs 9,500 Fixed assets 25,250 Equity 20,750 Taxable income $ 4,500 Total $ 35,750 Total $ 35,750 Taxes (40%) 1,800 Net income $ 2,700 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 20 percent dividend payout ratio. No external financing is possible. What is the internal growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.)

Explanation / Answer

Total assets = Current assets + Fixed assets = $(10,500 + 25,250) = $35,750

Return on asset (ROA) = Net income / Total asset = $2,700 / $35,750 = 0.0755

Dividend payout ratio (DPR) = 20% = 0.2

Earnings retention rate (b) = 1 - DPR = 1 - 0.2 = 0.8

Internal growth rate (g) = ROA x b = 0.0755 x 0.8 = 0.0604 = 6.04%

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