The Happy Pizza Co. has net income of $35,450, total equity of $128,100, and total assets of...

Question:

The Happy Pizza Co. has net income of {eq}\$35,450 {/eq}, total equity of {eq}\$128,100 {/eq}, and total assets of {eq}\$214,785 {/eq}. The dividend payout ratio is {eq}22 \% {/eq}. What is the internal growth rate?

Internal Growth Rate:

Internal growth rate is the maximum rate of growth for a firm if the firm only uses internal capital. In this case, the firm's return on asset is critical for the internal growth rate.

Answer and Explanation:

We can use the following formula to compute the internal growth rate:

  • internal growth rate = return on assets *(1 - dividend payout ratio)
  • internal growth rate = (net income / assets) *(1 - dividend payout ratio)
  • internal growth rate = (35,450 / 214,785) *( 1 - 22%)
  • internal growth rate = 12.87%

Learn more about this topic:

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Financial Growth Rates: Types & Determinants

from Finance 101: Principles of Finance

Chapter 4 / Lesson 5
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