Maggie\'s Muffins, Inc., generated $2,000,000 in sales during 2013, and its year

Question

Maggie's Muffins, Inc., generated $2,000,000 in sales during 2013, and its year-end total assets were $1,200,000. 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 5%, and its payout ratio will be 70%. 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.

Sales can increase by $ , that is by  %

Explanation / Answer

Let self-supporting growth rate be x%

Addition to Retained Earning = Next Year Sale * Profit Margin *(1-payout ratio )

Addition to Retained Earning = 2000000*(1+x%)*5%*(1-70%)

Addition to Retained Earning = 30000 + 300x

Total Fund Needed = Increase in Asset - Increase in spontaneous liability

Total Fund Needed = 1200000*x% - (500000 + 200000)*x%

Total Fund Needed = 12000x - 7000x

Total Fund Needed = 5000x

Total Fund needed is finaced through internal fund therefore

5000x = 30000 + 300x

x = 30000/(5000-300)

x = 6.38297

Answer

self-supporting growth rate = 6.38297%

Sales can increase by = 2000000*6.38297%

Sales can increase by =$ 127,659.57

Sales can increase by = $ 127,659.57 that is by 6.38%

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