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Asymmetric Frames Corp. had a return on equity of 15%. The corporation's earnings per share was $6.00, its dividend payout ratio was 40% and its profit-retention rate was 60%. If these relationships continue, what will be United Financial Corp.'s internal growth rate?

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jepessoa

Answer:

A) 9.0%

Explanation:

To determine the company's internal growth rate we must multiply the company's return on equity times the profit retention rate = 15% x 60%.

When a company generates net profits, it can do two things:

  1. distribute the profits as dividends ⇒ 40%
  2. increase retained earnings ⇒ 60%

When a company increases retained earnings it will have more money to finance new or existing projects, and will be able to grow without obtaining debt.

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