Maggie's Muffins Bakery generated $4 million in sales during 2019, and its year-end total assets were $2 million. Also, at year-end 2019, current liabilities were $1 million, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2020, 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 6%, and its payout ratio will be 45%. 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 calculations. Enter your answer for sales increase in dollars. For example, an answer of $2 million should be entered as 2,000,000.Round the monetary value to the nearest dollar and percentage value to one decimal place.
Here
Current sales = $4,000,000
Current total assets = $2,000,000
Profit margin = 6% = 0.06
Payout ratio = 45% = 0.45
Accounts payable = $500,000
Notes payable = $300,000
Accruals = $200,000
Current Spontaneous Liabilities = Accounts Payable + Accruals
= $500,000 + $200,000
= $700,000
Retention Ratio = 1 - Payout Ratio
= 1 - 0.45
= 0.55
Self-supporting Growth Rate = [Profit margin × Retention Ratio × Current Sales] ÷ [Current Total Assets - Current Spontaneous Liabilities - (Profit margin × Retention Ratio × Current Sales)]
= [0.06 × 0.55 × $4,000,000] ÷ [$2,000,000 - $700,000 - (0.06 × 0.55 × $4,000,000)]
= $132,000 ÷ [1,300,000 – (132,000)]
= $132,000 ÷ $1,168,000
= 0.11301
= 11.30%
Get Answers For Free
Most questions answered within 1 hours.