Question

Maggie's Muffins, Inc., generated $2,000,000 in sales during 2015, and its year-end total assets were $1,300,000. 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 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 steps. Round your answers to the nearest whole. Sales can increase by $ , that is by %.

Answer 1

Sales, S0 = $2,000,000
Total Assets, A0 = $1,300,000
Profit Margin, M = 4%

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.50
Retention Ratio, b = 0.50

Spontaneous Current Liabilities, L0 = Accounts Payable + Accruals
Spontaneous Current Liabilities, L0 = $500,000 + $200,000
Spontaneous Current Liabilities, L0 = $700,000

Self-Supporting Growth Rate = [M * b * S0] / [A0 - L0 - M * b * S0]
Self-Supporting Growth Rate = [0.04 * 0.50 * $2,000,000] / [$1,300,000 - $700,000 - 0.04 * 0.50 * $2,000,000]
Self-Supporting Growth Rate = $40,000 / $560,000
Self-Supporting Growth Rate = 0.07 or 7%

Increase in Sales = S0 * Self-Supporting Growth Rate
Increase in Sales = $2,000,000 * 0.07
Increase in Sales = $140,000

Sales can increase by $140,000, that is by 7%