You are given the following information for Zonama Inc, for the fiscal year ending December 2018

Finance Mar 08, 2021

You are given the following information for Zonama Inc, for the fiscal year ending December 2018. Sales is 232, 887 million net income is 10.073 million, total assets is 162, 648 million shareholders equity is 143,549 million and the firm pays out 30% of net income as dividends. Calculate the internal growth rate. Can the firm grow at 5% without funds externally?

Expert Solution

Computation of the internal growth rate:-

Return on assets (ROA) = Net income / Total assets

= 10073 / 162,648

= 6.19%

Retention ratio = 1 - Dividend payout ratio

= 1 - 30%

= 70%

Internal growth rate = (ROA * Retention ratio) / (1 - (ROA * Retention ratio))

= (6.19% * 70%) / (1 - (6.19% * 70%))

= 4.34% / 95.66%

= 4.53%

The firm can not grow at 5% because it is higher than the internal growth rate.

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