Question

Maggie's Muffins Bakery generated $2,000,000 in sales during 2016, and its year-end total assets were $1,500,000. Also, at year-end 2016, 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 2017, 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 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 calculations. Round your answers to the nearest whole.

Sales can increase by $ that is by %.

Answer 1

Step 1: Calculate Self-Supporting Growth Rate

The value of self-supporting growth rate is determined as below:

Self-Supporting Growth Rate = (Profit Margin*(1-Dividend Payout Ratio)*Current Sales)/(Total Assets - Spontaneous Liabilities - Profit Margin*(1-Dividend Payout Ratio)*Current Sales)

Here, Profit Margin = 5%, Dividend Payout Ratio = 40%, Current Sales = $2,000,000, Total Assets = $1,500,000, Spontaneous Liabilities = 500,000 + 200,000 = $700,000

Using these values in the above formula, we get,

Self-Supporting Growth Rate = (5%*(1-40%)*2,000,000)/(1,500,000 - 700,000 - 5%*(1-40%)*2,000,000) = 8.1081%

_____

Step 2: Calculate the Amount by which Sales can Increase

The amount by which the sale can increase is calculated as below:

Amount by which Sales can Increase = Current Sales*Self-Supporting Growth Rate = 2,000,000*8.1081% = $162,162.16 or $162,162

Sales can increase by $162,162 (rounded off) that is by 8% (rounded off).