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10 May, 16:56

Levine, Inc., has an ROA of 8.6 percent and a payout ratio of 33 percent.

What is its internal growth rate?

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  1. 10 May, 17:17
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    Internal growth rate is the highest possible growth attained by a business without obtaining outside funding but with its retained earning.

    Given information

    ROA = 8.6%

    Percentage Payout ratio = 33%

    Internal growth rate = (ROA * Retention ratio) / 1 - (ROA * Retention ratio)

    Retention ratio is the percentage earning that is no paid out in dividends

    To calculate the retention ratio, we use the formula

    Retention ratio = (1-percentage pay out ratio)

    = 1 - 0.33 = 0.67

    Substituting retention ratio for 0.67 in the inter growth rate formula

    Therefore

    Internal growth rate = (0.086*0.67) / 1 - (0.086*0.67)

    0.05762 / (1-0.05762) = 0.05762/0.94238

    =0.0611

    = 6.11%
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