Question
In: Finance
Ball Corp. generated 2.0 million in sales during 2015, and its year end total assets were...
Ball Corp. generated 2.0 million in sales during 2015, and its year end total assets were 1.5 million. Also, at year end 2015, current liabilities were 500000, consisting of 200,000 notes payable, 200,000 account payable, and 100,000 accruals. Looking ahead to 2016, the company estimates that its assets must increase by 75cents for every 1 dollar increase in sales. Ball Corp's profit margin is 5% and it's payout ratio is 60%. How large a sales increase can the company achieve without having to raise funds externally?
Solutions
Expert Solution
| External Funds Needed = Increase in assets - Increase in liabilities - Increase in retained earnings | |||||||||||||
| Let us assume sales growth rate be y | |||||||||||||
| External Funds Needed = 0 | |||||||||||||
| Increase in assets = 2015 total assets level * 0.75y = $15,00,000 * 0.75y = $1125000y | |||||||||||||
| Increase in liabilities = (2015 accounts payable + 2015 accruals) * 0.75y = $300000*0.75y = $225000y | |||||||||||||
| Increase in retained earnings = 2015 Sales *(1+Sales growth rate) * Profit Margin * Retention rate = $20,00,000*(1+y)*0.05*(1-0.60) = $40000(1+y) | |||||||||||||
| External Funds Needed = Increase in assets - Increase in liabilities - Increase in retained earnings | |||||||||||||
| 0 = 1125000y -225000y - 40000(1+y) | |||||||||||||
| 0 = 860000y - 40000 | |||||||||||||
| y = 40000/860000 | |||||||||||||
| y = 0.046512 | |||||||||||||
| Sales growth = 4.65% | |||||||||||||
| Company can grow sales by 4.65% without having to raise funds externally. | |||||||||||||
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