Question

Paladin Furnishings generated $4 million in sales during 2016, and its year-end total assets were $2.2 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.55 for every $1.00 increase in sales. Paladin's profit margin is 4%, and its retention ratio is 50%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Increase in sales that the company can achieve without having to raise funds externally

The amount sales increase that the company can achieve without having to raise funds externally is calculated by multiplying the current year sales with the self-supporting growth rate

Calculation of Self-supporting Growth Rate

Current Year Sales = $4,000,000

Profit Margin = 4.00%

Dividend Payout Ratio = 50%

Therefore, the Retention Ratio = 50%

Total Spontaneous Liabilities = $300,000 [$200,000 + $100,000]

Last Year Total Assets = $2,200,000

Therefore, the Self-supporting Growth Rate = Addition to Retained Earnings / [Total Assets – Total Spontaneous Liabilities - Addition to Retained Earnings]

= [Last year sales x Profit Margin x (1 – Dividend Payout Ratio)] / [Total Assets – Total Spontaneous Liabilities - Addition to Retained Earnings]

= [$4,000,000 x 0.04 x (1 – 0.050)] / [$2,200,000 - $300,000 – {[$4,000,000 x 0.04 x (1 – 0.050)}]

= $80,000 / [$2,200,000 - $300,000 - $80,000]

= $80,000 / $1,820,000

= 0.04395604 or

= 4.395604%

Therefore, the Increase in sales that the company can achieve without having to raise funds externally = Last Year Sales x Self-supporting Growth Rate

= $4,000,000 x 4.365604%

= $175,824.18

“Hence, the Increase in Sales would be $175,824.18”