Sales Increase: Maggie%u2019s Muffins, Inc., generated $5,000,000 in sales durin

Question

Sales Increase: Maggie%u2019s Muffins, Inc., generated $5,000,000 in sales during 2012, and its year-end total assets were $2,500,000. Also, at year-end 2012, 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 2013, the company estimates that is 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 7%, and it payout ratio will be 80%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate?

Explanation / Answer

AFN = (A*/S0)%u2206S - (L*/S0)%u2206S - MS1(RR)

where A* = Assets tied directly to sales = $2.5M

L* = Liabilities that increase spontaneously (AP and accruals %u2013 not bank loans or bonds) =Acct Payable+Accrued Liab = $0.5+0.3M =0.8M

A*/S0 = 2.5/5= 0.50

L*/S0 %u2013 percentage of sales =0.8/8 = 0.1

S0=Sales last year = $5M

S1=Sales this year

%u2206S = change in sales

M = profit margin =7%

RR = retention ratio= (1-dividend payout)=(1-80%)=20%

So AFN = (0.50)*%u2206S -(0.1)*%u2206S -7%*S1*20% = 0

So (0.50)*%u2206S - (0.1)*%u2206S- 0.014*S1 = 0

ie 0.4*%u2206S - 0.014*S1=0

ie 0.4*(S1-S0) - 0.014*S1 = 0

ie 0.386*S1 = 0.4*S0

ie S1 = 0.4*S0/0.386 = 0.4*5000000/0.386

ie S1 =$5,181,347

So sales increase that company achieve without having to raise funds externally

= S1-S0

= $5,181,347 -$5000,000

= $181,347

SO %age increase = $181,347/5,000,000 = 3.63%

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