Petal Providers Corporation opens and operates “mega” floral stores in the U.S.

Question

Petal Providers Corporation opens and operates “mega” floral stores in the U.S. The idea behind the super store concept is to model the U.S. floral industry after its European counterparts whose flower markets generally have larger selections at lower prices. Petal Providers Corporation is interested in estimating its sustainable sales growth rate. Last year revenues were $1 million, the net profit was $50,000, the investment in assets was $750,000, payables and accruals were $100,000, and equity at the end of the year was $450,000 (i.e., beginning of year equity of $400,000 plus retained profits of $50,000). The venture did not pay out any dividends and does not expect to pay dividends for the foreseeable future.

A. Estimate the sustainable sales growth rate for Petal Providers based on the information provided in this problem.

B. How would your answer in Part A change if economic growth is average and Petal Providers’ net profit margin is 7 percent?

Petal Providers Corporation, is interested in estimating its additional financing needs to support a rapid increase in sales next year. Last year revenues were $1 million, the net profit was $50,000, the investment in assets was $750,000, payables and accruals were $100,000, and equity at the end of the year was $450,000. The venture did not pay out any dividends and does not expect to pay dividends for the foreseeable future.

C. What would be your estimate of the additional funds needed next year to support a 30 percent increase in sales?

D. How would your answer in Part A change if the expected sales growth were only 15 percent?

Explanation / Answer

a) Sustainable growth rate= ROE*Retention rate

ROE= Net profit/Equityat begining

=50000/400000=12.5%

Rention ratio rate =100%( since no dividend paid)

Sustainable growth rate=12.5%*100%= 12.5%

b) Given net profit margin = 7% = .07*sales= 0.07*1mn= $70,000

ROE= 70,000/(400,000)=17.5%

growth rate = 17.5%*100%= 17.5% (Assuming no dividend paid)

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