Maggie’s Muffins, Inc., generated $5,000,000 in sales during 2013, and its year-

Question

Maggie’s Muffins, Inc., generated $5,000,000 in sales during 2013, and its year-end total assets were $2,500,000. 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 7%, and its 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

Current Sales S0          5,000,000 Total Assets =A=          2,500,000 Current Liabilities          1,000,000 Equities =E=          1,500,000 Profit Margin =m= 7% dividend payout ratio 80% Self Sustaining Growth rate g =[ m(1-d)A/E]/[A/S0-m(1-d)A/E]               = [0.07(1-0.80)*2500000/1500000]/[2500000/5000000-0.07(1-0.80)*2500000/1500000]                                 = 0.048877701                                = 4.88% So self sustaining growth rate is 4.88%

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