Fall 98 - MC Question 18

tglassman@chubb.com
Tue, 3 Nov 1998 08:14:31 -0500

Since the CAS discussion forum is slow, I'll post my question here:

I believe the answer to question 18 is B.

Internal Growth Rate = Plowback Ratio * ROE * Equity/Assets
Plowback = (1-Div Payout) = .40
Net Income = REV-CGS-INT-TAX = 2000-1600-40-126 = 234
Equity = Assets - Outstanding Debt = 1000-500 = 500
ROE = Net Income/Equity = 234/500 = .468
Equity/Assets = 500/1000 = .5

Therefore: Internal Growth Rate = .4*.468*.5 = .0936

Please comment.