Go Go Industries is growing at 25% per year. It is all-equity-financed and has t
ID: 2764527 • Letter: G
Question
Go Go Industries is growing at 25% per year. It is all-equity-financed and has total assets of $1 million. Its return on equity is 10%. Its plowback ratio is 25%.
What is the internal growth rate? (Enter your answer as a percent rounded to 2 decimal places.)
What is the firm’s need for external financing this year? (Enter your answer in dollars not in millions. Do not round intermediate calculations.)
By how much would the firm increase its internal growth rate if it reduced its payout ratio to zero? (Enter your answer as a whole percent.)
Calculate the revised required external financing. (Enter your answer in dollars not in millions. Do not round intermediate calculations.)
Go Go Industries is growing at 25% per year. It is all-equity-financed and has total assets of $1 million. Its return on equity is 10%. Its plowback ratio is 25%.
Explanation / Answer
a. Internal growth rate = ROA * Plowback ratio / [1 - ROA * Plowback ratio]
Since, entire asset is equity financed, so ROA = ROE
Therefore,
Internal growth rate = ROE * Plowback ratio / [1 - ROE * Plowback ratio]
= 10% * 25% / [1 - 10% * 25%]
= 2.56%
b. External financing = Total assets * growth rate - Retained earning
= $1,000,000 * 25% - 10% * $1,000,000 * 25%
= $225,000
c. Internal growth rate = ROE * Plowback ratio / [1 - ROE * Plowback ratio]
= 10% * 100% / [1 - 10% * 100%]
= 11.11%
d. External financing = Total assets * growth rate - Retained earning
= $1,000,000 * 25% - 10% * $1,000,000 * 100%
= $150,000
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