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 2015, and its year-end total assets were $1,300,000. Also, at year-end 2015, 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 2016, 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 4%, and its payout ratio will be 40%. 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%)*4%*(1-40%) Addition to Retained Earning = 48000 + 480x Total Fund Needed = Increase in Asset - Increase in spontaneous liability Total Fund Needed = 1300000*x% - (500000 + 200000)*x% Total Fund Needed = 13000x - 7000x Total Fund Needed = 6000x Total Fund needed is finaced through internal fund therefore 6000x = 48000 + 480x x = 48000/(6000-480) x = 8.695 Answer self-supporting growth rate = 8.65% Sales can increase by = 2000000*8.65% Sales can increase by =$ 173,000 Sales can increase by = $ 173,000 that is by 8.65%

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