Question

Maggie's Muffins Bakery generated $4 million in sales during 2018, and its year-end total assets were $2.4 million. Also, at year-end 2018, 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 2019, 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 4%, and its payout ratio will be 50%. 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. Round the monetary value to the nearest dollar and percentage value to the nearest whole number.

Sales can increase by $ ________ that is by_______ %.

Answer 1

Following information is given

Current Sales	$4,000,000
Current total assets	$2,400,000
Profit Margin	4%
Payout Ratio	50%
Accounts Payable	$500,000
Notes Payable	$300,000
Accruals	$200,000

Current spontaneous Liabilities = Account payable + Accruals

= $500,000 + $200,000

= $700,000

Retention Ratio = 1 - P/E Ratio

= 1 - 0.5

= 0.5

Self supporting Growth Rate = [ Profit margin x retention ratio x current sales] / [Current assets - Current spontaneous Liabilities - ( Profit margin x retention ratio x current sales)]

= [0.04 x 0.5 x 4000000] / [ 2400000 - 700000 - (0.04 x 0.5 x 4000000)]

  = 80000 / 1620000

= 0.049 or 4.9% or 5% (Approx)

Sales increase by 80000