Sales Increase Maggie\'s Muffins, Inc., generated $2,000,000 in sales during 201

Question

Sales Increase

Maggie's Muffins, Inc., generated $2,000,000 in sales during 2013, and its year-end total assets were $1,600,000. Also, at year-end 2013, 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 2014, 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 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.

Explanation / Answer

Here we need to calculate Sustainable growth rate:

SGR = Retention ratio x ROE

Retention ratio = 1 – payout ratio

                                = 1-0.45

                                =0.55

Shareholder’s equity in 2013 = total assets – total liabilities

                                                                =1,400,000 -1,000,000

                                                                =400,000

Net profit in 2013 = sales x profit margin

                                    =2,000,000 x6%

                                    = 120,000

ROE = net income/ shareholder’s equity

         = 120,000 / 400,000

         =30%

SGR = 0.55 x 30%

         =16.50%

Increase in sales = 2,000,000 x 16.50%

                                = 330,000

% increase =16.50%

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