QuestionJuly 17, 2025

12. A company has 100,000 in retained earnings, 1 million in total assets.and 200,000 in total liabilities. What is its internal growth rate? 0.20 1.20 0.80 0.10

12. A company has 100,000 in retained earnings, 1 million in total assets.and 200,000 in total liabilities. What is its internal growth rate? 0.20 1.20 0.80 0.10
12. A company has 100,000 in retained earnings, 1 million in total assets.and 200,000 in total liabilities. What is its internal growth rate? 0.20 1.20 0.80 0.10

Solution
4.2(236 votes)

Answer

0.125 Explanation 1. Calculate Equity Equity = Total Assets - Total Liabilities = 1,000,000 - 200,000 = 800,000. 2. Calculate Return on Equity (ROE) ROE = \frac{\text{Net Income}}{\text{Equity}}. Assume Net Income equals Retained Earnings for simplicity. Thus, ROE = \frac{100,000}{800,000} = 0.125. 3. Calculate Retention Ratio Retention Ratio = \frac{\text{Retained Earnings}}{\text{Net Income}} = \frac{100,000}{100,000} = 1. 4. Calculate Internal Growth Rate **Internal Growth Rate** = ROE \times Retention Ratio = 0.125 \times 1 = 0.125.

Explanation

1. Calculate Equity<br /> Equity = Total Assets - Total Liabilities = $1,000,000 - 200,000 = 800,000$.<br /><br />2. Calculate Return on Equity (ROE)<br /> ROE = $\frac{\text{Net Income}}{\text{Equity}}$. Assume Net Income equals Retained Earnings for simplicity. Thus, ROE = $\frac{100,000}{800,000} = 0.125$.<br /><br />3. Calculate Retention Ratio<br /> Retention Ratio = $\frac{\text{Retained Earnings}}{\text{Net Income}} = \frac{100,000}{100,000} = 1$.<br /><br />4. Calculate Internal Growth Rate<br /> **Internal Growth Rate** = ROE $\times$ Retention Ratio = $0.125 \times 1 = 0.125$.
Click to rate:

Similar Questions