Let's break down the problem step-by-step. **Given Data:** - Net income (NI) = \$300 - Total equity (TE) = \$2,500 - Debt-equity ratio (D/E) = 0.8 - Plowback ratio (b) = 50% = 0.5 --- ### Step 1: Find the Return on Equity (ROE) ROE = Net Income / Total Equity \[ ROE = \frac{300}{2500} = 0.12 \text{ or } 12\% \] --- ### Step 2: Find the **Retained Earnings** to use in growth calculation Since the plowback ratio is 50%, retained earnings are: \[ \text{Retained Earnings} = \text{Net Income} \times b = 300 \times 0.5 = 150 \] --- ### Step 3: Find the **Total Assets** From the debt-equity ratio: \[ D/E = 0.8 \] Total assets (A) relate to equity and debt: \[ A = E + D \] But: \[ D = D/E \times E = 0.8 \times 2500 = 2000 \] Therefore: \[ A = E + D = 2500 + 2000 = 4500 \] --- ### Step 4: Find the **Total Asset Turnover (TAT)** or **Return on Assets (ROA)** To find the internal growth rate, we need the firm's **ROA**: \[ ROA = \frac{\text{Net Income}}{\text{Total Assets}} = \frac{300}{4500} = 0.0667 \text{ or } 6.67\% \] ### Step 5: Calculate the **Internal Growth Rate (IGR)** The formula for IGR is: \[ IGR = \frac{ROA \times b}{1 - ROA \times b} \] where: - \(ROA\) is the return on assets - \(b\) is the plowback ratio Plugging in the numbers: \[ IGR = \frac{0.0667 \times 0.5}{1 - 0.0667 \times 0.5} = \frac{0.03335}{1 - 0.03335} = \frac{0.03335}{0.96665} \approx 0.0345 \] Expressed as a percentage: \[ IGR \approx 3.45\% \] --- ## **Final Answer:** **The internal growth rate of Skyline Innovations is approximately \(\boxed{3.45\%}\).**