Question

Maggie's Muffins, Inc., generated $2,000,000 in sales during 2015, and its year-end total assets were $1,500,000. Also, at year-end 2015, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2016, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 7%, and its payout ratio will be 70%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate? Do not round intermediate steps. Round your answers to the nearest whole. Sales can increase by $_____ which is ____%

Answer 1

a)

Self support growth rate g = _   (M*(1-POR)*S₀ )____________                              

(A₀ – L₀ – M*(1-POR)*S₀)

Where:

M (Profit margin) = net income / sales = 7%

POR = Payout ratio = 70%

S₀ = Sales = $2,000,000

A₀ = Assets = $1,500,000

L₀ = accounts payable and accruals = $500,000+$200,000=$700,000

Then g = (0.07*(1-0.7)*2000000) / ( 1500000-700000-0.07*(1-0.7)*2000000 )

=4200 / (800000-4200)

= 5.541%

b) How large a sales increase

= sales* self support growth rate

=$2,000,000*0.05541

=$110,818

Hence, sales can increase by $110,818.