Moore Money Inc. has a profit margin of 11% and a retention ratio of 70%. Last year, the firm had sales of $500 and total assets of $1,000.
What is the internal growth rate?
The internal growth rate is a measure of the maximum growth a company can achieve using only its retained earnings. It can be calculated using the following formula:
Internal Growth Rate = Retention Ratio x Return on Assets
In this case, the retention ratio is given as 70%, and we need to calculate the return on assets (ROA) in order to find the internal growth rate. The ROA can be calculated using the profit margin:
ROA = Profit Margin x Total Assets
Given that the profit margin is 11% and the total assets are $1,000, we can calculate the ROA as follows:
ROA = 0.11 x $1,000 = $110
Now, we can calculate the internal growth rate using the formula mentioned earlier:
Internal Growth Rate = 0.70 x $110 = $77
Therefore, the internal growth rate for Moore Money Inc. is $77.
The internal growth rate can be calculated using the following formula:
Internal Growth Rate = Retention Ratio × Return on Assets
First, we need to calculate the return on assets (ROA). We can do this by multiplying the profit margin by the asset turnover ratio.
Asset Turnover Ratio = Sales / Total Assets
Profit Margin = Net Income / Sales
Given that profit margin is 11% and sales are $500, we can calculate the Net Income:
Net Income = Profit Margin × Sales
Net Income = 0.11 × $500
Net Income = $55
Now, we can calculate the asset turnover ratio:
Asset Turnover Ratio = Sales / Total Assets
Asset Turnover Ratio = $500 / $1000
Asset Turnover Ratio = 0.5
Now, we can calculate the ROA:
ROA = Profit Margin × Asset Turnover Ratio
ROA = 0.11 × 0.5
ROA = 0.055 = 5.5%
Finally, we can calculate the internal growth rate using the retention ratio:
Internal Growth Rate = Retention Ratio × Return on Assets
Internal Growth Rate = 0.7 × 0.055
Internal Growth Rate = 0.0385 = 3.85%
Therefore, the internal growth rate for Moore Money Inc. is 3.85%.