Question

Approximate Precision Tools generated $800,000 in sales during 2017, and its year-end total assets were $640000 . Also, at year-end 2017, current liabilities were $300,000 , consisting of $80,000 of notes payable, $120,000 of accounts payable and $100,000 of accruals. Looking ahead to 2018, the company estimates that its assets and spontaneous liabilities must increase at the same rate as sales. Its profit margin will be 5%, and its payout ratio will be 60%. What is the company’s self-supporting growth rate and how large a sales increase (in dollars) can the company achieve without having to raise funds externally?

Answer 1

Here firstly, we have to find out self-supporting growth rate - Without having additional or excess capital investment a firm can achieve rate of growth in sales is known as self supporting growth rate means growing with internal resources.

Then we have to find out return on investment (ROI) = Operating profit / (Total Assets-Current Liabilities)

5% is Operating Income ($40,000) - ($640,000-$300,000) = 11.76 % (ROI also in good position)

Payout ratio - Dividends of net imcome a firm pays to its shareholder's or investors is called payout ratio. Here in this example 60% payout ratio mean more than half of the net income paying to stockholder's.(its Good Payout ratio)

Self-Supporting growth ratio (SSGR) = NFAT X NPM X (1-DPR) - Dep

NFAT(Net Fixed Asset Turn Over) = Sales / net fixed asset ($800,000/$64,000 = 1.25)

NPM - Net profit margin = ($800,000 X 5%) = $40,000

DPR - Dividend payout ratio = 60% = .60

Dep - Depreciation = NIL

1.25 X $40,000 X (1-.60) = 1.25 X $40,000 X .40 = $20,000

Sales can be increase by $20,000