Question

Paladin Furnishings generated $2 million in sales during 2019, and its year-end total assets were $1.6 million. Also, at year-end 2019, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2020, the company estimates that its assets must increase by $0.80 for every $1.00 increase in sales. Paladin's profit margin is 4%, and its retention ratio is 55%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

$ ________

Answer 1

Calculation of sales increase that the company can achieve without having to raise funds externally

Profit Margin = 4% =0.04

Retention Ratio =55%=0.55

Total Assets =$1600000

Accounts Payable =$200000

Accrued Liabilities =$100000

Spontaneous liabilities = Accounts payable + Accrued liabilities = $200000+$100000 =$300000

Self sustaining growth rate = ( Profit margin x retention ratio x sales ) / ([Total Assets -Spontaneous liabilities] - [profit margin x retention ratio x sales] ) =(0.04 x 0.55 x $2000000) / ([$1600000-$300000] -[0.04 x 0.55 x $2000000] =$44000 / ($1300000 - $44000) =$44000/$1256000 =0.035031847 ie. 3.5031847 %

Therefore the Increase in Sales amount =Sales amount x Self sustaining growth rate = $2000000 x 3.5031847% =$70063.69 approximately

Company can achieve a sales increase by $ 70063.69 without raising fund externally.