Question

Maggie’s Muffins, Inc., generated 7,000,000 in sales during 2018, and its year-end total assets were 4,000,000. Also, at year-end 2018, current liabilities were 1,300,000, consisting of 500,000 of notes payable, 500,000of accounts payable, and 300,000 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 6%, and its payout ratio will be 70%. What’s the firm self-supporting growth rate?

Answer 1

Calculation of self-supporting growth rate:

Self-supporting growth rate = M (1-POR) (S0) / A0 – L0 – M (1-POR) (S0)

M = Net Income/Sales = 6%

POR = Payout ratio = 70%

S0 = Sales = $7,000,000

A0 = $4,000,000

L0 = Spontaneous liabilities = $500,000 + $300,000 = $800,000 [only the accountspayable and accruals are considered spontaneous liabilities]

Substituting in the above equation, we get:

.06 (1 - .70) (7,000,000) / 4,000,000 - 800,000 - .06 (1 - .70) (7,000,000)

= $126,000 / $3,074,000

= 0.0410 or 4.10%