Question

Maggie's Muffins Bakery generated $2,000,000 in sales during 2016, and its year-end total assets were $1,700,000. Also, at year-end 2016, 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 2017, 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 5%, and its payout ratio will be 40%. 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 your answers to the nearest whole.

Sales can increase by $ , that is by %.

Answer 1

2016:

Sales, S0 = $2,000,000
Total Assets, A0 = $1,700,000

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

Profit Margin, M = 5%
Payout Ratio, POR = 40%

Retention Ratio, b = 1 - POR
Retention Ratio, b = 1 - 0.40
Retention Ratio, b = 0.60

Self-supporting Growth Rate, g = [S0 * b * M] / [A0 - L0 - S0 * b * M]
Self-supporting Growth Rate, g = [$2,000,000 * 0.60 * 0.05] / [$1,700,000 - $700,000 - $2,000,000 * 0.60 * 0.05]
Self-supporting Growth Rate, g = $60,000 / $940,000
Self-supporting Growth Rate, g = 0.06 or 6%

Increase in Sales = S0 * g
Increase in Sales = $2,000,000 * 6%
Increase in Sales = $120,000

Sales can increase by $120,000, that is by 6%.