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 = 3.00%
Dividend Payout Ratio = 50%
Therefore, the Retention Ratio = 50%
Total Spontaneous Liabilities = $300,000 [$200,000 + $100,000]
Last Year Total Assets = $3,200,000
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 0.03 x (1 – 0.50)] / [$3,200,000 - $300,000 – {[$4,000,000 x 0.04 x (1 – 0.050)}]
= $60,000 / [$3,200,000 - $300,000 - $60,000]
= $80,000 / $2,840,000
= 0.02112676 or
= 2.112676%
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 2.112676%
= $84,507.04
“Hence, the Increase in Sales will be $84,507.04”
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