| Go Go Industries is growing at 50% per year. It is all-equity-financed and has total assets of $1 million. Its return on equity is 45%. Its plowback ratio is 60%. |
| a. | What is the internal growth rate? (Enter your answer as a percent rounded to 2 decimal places.) |
| Internal growth rate | % |
| b. | What is the firm’s need for external financing this year? (Enter your answer in dollars not in millions. Do not round intermediate calculations.) |
| External financing | $ |
| c. | 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.) |
| Internal growth rate | % |
| d. | Calculate the revised required external financing. (Enter your answer in dollars not in millions. Do not round intermediate calculations.) |
| External financing | $ | |
We have been provided with the information as follow
| Growth rate | 50.00% | |||||||||
| Equity | 100.00% | |||||||||
| Total assets | $ 1,000,000.00 | |||||||||
| ROE | 45.00% | |||||||||
| Plowback ratio | 60.00% | |||||||||
|
a. |
What is the internal growth rate? | |||||||||
| Internal growth rate | = | 27.00% | ||||||||
Working
Internal Growth rate (IGR) = ROA x Retention Ratio
1-(ROA x Retention Ratio)
Where as
ROA= Net Profit / Total of Assets of the firm
Retention Ratio = 1 – Dividend pay out of the firm
2
| Retained earnings | = | $ 270,000.00 | |
| New assets | = | $ 500,000.00 | |
| External financing | = | $ 230,000.00 | |
270,000 =1,000,000*45% *60%
5000,00=1,000,000*50%
230,000=500,000-270,000
3
| Payout ratio | = | 0.00 | |
| Plowback ratio | = | 1.00 | |
| Internal growth rate | = | 45.00% | |
4
| If plowback ratio is | 1 | , then retained earnings, will be: | ||||
| Retained earnings | = | $ 450,000.00 | ||||
| External financing | = | $ 50,000.00 | ||||
| We conclude that reductions in the dividend payout ratio reduce requirements for | ||||||
| external financing. | ||||||
