Afirm has adopted a policy whereby it will not seek any additional external financing. given this, what is the maximum growth rate of the firm if it has net income of $12,000, total equity of $40,000, total assets of $80,000, and a 40 percent dividend payout ratio?

9%

Explanation:

Given:

The net income = $12,000

Total equity = $40,000

Total assets = $80,000

Dividend payout ratio = 40%

Now,

Internal rate of return, r =

or

Internal rate of return, r =

or  

Internal rate of return, r = 15%

and,

Retention ratio = 1 - Dividend payout ratio

= 1 - 0.40

= 0.60 or 60%

Now,

Growth rate = Retention ratio × Internal rate of return

or

Growth rate = 0.60 × 0.15

or

Growth rate = 0.09

or

Growth rate = 9%

answer; synthetic production system;