Question

Last year Rain Repel Corporation had an ROA of 5 percent and a dividend payout ratio of 90 percent. What is the internal growth rate?

Answer 1

Answer:

0.5%

Explanation:

Given that,

Return on asset (ROA) = 5 percent

Dividend payout ratio = 90 percent

Here, the internal growth rate is calculated by multiplying ROA with (1 - Dividend payout ratio).

Internal growth rate:

= [Return on asset × (1 - Dividend payout ratio)] × 100

= [5 percent × (1 - 90 percent)] × 100

= (0.05 × 0.1) × 100

= 0.005 or 0.5%

Therefore, the internal growth rate is 0.5%.