Derive equation 18-8 for the internal growth rate. Let S = last year's sales revenue; A = last year's total assets; D = last year's total liabilities; E = last year's stockholder's equity; NI/S =the firm's (presumably constant) profit margin, the ratio of net income to sales; g = the firm's expected sales growth rate; RR = the firm's (presumably constant) retention ratio.
Using these symbols and relationships you are familiar with, find the following answers:
a. What will this year's net income equal?
b. How much will be added to stockholder's equity this year?
c. What is this year's level of assets?
d. What is the change in assets between last year and this year?
e. The change in assets computed in part (d) has to be financed. Assuming only internal financing is available, compute the firm's internal growth rate. (Hint: Set your answers to part (b) and (d) equal to each other, and solve for g.)