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Gilmore, Inc
Gilmore, Inc., had equity of $200,000 at the beginning of the year. At the end of the year, the company had total assets of $355,000. During the year, the company sold no new equity. Net income for the year was $42,000 and dividends were $6,000.
a. Calculate the internal growth rate for the company. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the internal growth rate using ROA x b for beginning of period total assets. Met not retamel int/alma/Cato emeniationS and enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.) c. Calculate the internal growth rate using ROA x b for end of period total assets. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
a. Internal growth rate • ok b. ROA x b (using beginning of period assets) • c. ROA x b (using end of period assets) •
Expert Solution
a&b) Computation of Internal Growth Rate of the Company:
Total Assets (t-0) = $355,000
Net Income = $42,000
Dividends = $6,000
ROA = Net Income / Total Assets = $42,000/$355,000 = 11.83%
Retention Ratio = b = (Net Income - Dividends) / Net Income = $36,000/$42,000 = 85.71%
Internal Growth Rate = (ROA * b) / (1 - ROA * b)
IGR = 11.83%*85.71% / (1 - 11.83%*85.71%) = 11.29%
c) Computation of Internal Growth Rate using ROA*b for end of period total assets:
Total Assets (t=1) = Total Assets (t=1) + Net Income - Dividends = $355,000 + $42,000 - $6,000 = $391,000
ROA = $42,000/ $391,000 = 10.74%
IGR = 10.74%*85.71% / (1 - 10.74%*85.71%) = 10.14%
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