Question

Lullaby Lane Bedding Inc. needs to determine the amount of growth the firm could experience without having to obtain external financing. The current sales level is $800,000, the net profit margin is 6%, and the dividend payout ratio is 40%. Assume the firm is currently operating at full capacity and all assets will increase proportionately with sales. Lane’s current balance sheet follows:

Cash	$ 30,000	Accounts Payable	$140,000
Accounts Receivable	90,000	Notes Payable	50,000
Inventories	110,000	Long-term Debt	280,000
Net Fixed Assets	380,000	Common Stock	40,000
	$610,000	Retained Earnings	100,000
			$610,000

This is urgent, I will thumbs up if answered quickly.

Answer 1

Calculation of the firms Growth rate

Let's take "g" as the Growth Rate of the firm

External Financing Needed (EFN) = Increase in total assets – Increase in Liabilities – Addition to Retained Earnings

$0 = [{Total Assets/(Sales x g)} x (Sales x g)] + [{Accounts Payable/(Sales x g)} x (Sales x g)] – [Sales(1 + g) x Profit Margin x (1 – Dividend Pay-out Ratio]

$0 = [($610,000/$800,000g) x $800,000g] + [($140,000/$800,000) x ($800,000g)] – [$800,000(1 + g) x (0.06) x (1 - 0.40)]

$0 = $610,000g - $140,000g - $28,800 - $28,800g

$28,800 = $441,200g

g = $28,800 / $441,200

g = 0.0653

g = 6.53%

“Therefore, the amount of growth the firm could experience without having to obtain external financing = 6.53%”