The most recent financial statements for Lance Co. are shown here: Income Statem

Question

The most recent financial statements for Lance Co. are shown here:

  Income Statement Balance Sheet

Sales        $11,700.00      Current Assets   $12,436        Debt $24,865

Costs                7,722.00         Fixed Assets      30,447        Equity   18,018

Taxable Income      3,978.00         Total    $42,883      Total   $42,883

Tax (33%)             1,312.74

Net income $2,665.25

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external equity financing is possible. What is the internal growth rate?

2.91 percent

3.44 percent

3.87 percent

4.02 percent

2.91 percent

3.44 percent

3.87 percent

4.02 percent

Explanation / Answer

ROA = Net Income / Total Assets
ROA = $2665.25/$42,883 = 6.22%
Plowback ratio, b = ( 1- 40%) = 60%
Internal Growth Rate = (ROA x b) / [1-(ROA x b)]
Internal Growth Rate = (6.22% x 60%) / [1-(6.22% x 60%)] = 3.732% /96.27%) = 3.87 %

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